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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD OF TO
COMMISSION FILE NO. 1-3410
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-3317668
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
399 EXECUTIVE BOULEVARD
ELMSFORD, NY 10523
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(914) 592-2355
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes __ No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock, $.01 par value, held by
non-affiliates of the registrant on December 15, 1999 was $20,454,000.
The aggregate number of shares of common stock, $.01 par value, outstanding
on December 15, 1999 was 13,636,000.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
1998 FORM 10-K
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TABLE OF CONTENTS
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PART I
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Item 1. Business.................................................... 1
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 25
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 25
PART III
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Item 10. Directors, Executive Officers and Key Employees of
Registrant................................................ 26
Item 11. Executive Compensation...................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 32
Item 13. Certain Relationships and Related Transactions.............. 33
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 35
Index to Financial Statements......................................... 36
Financial Statements.................................................. F-1
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PART I
ITEM 1. BUSINESS.
American Bank Note Holographics, Inc. ("ABNH") originates, mass-produces
and markets holograms. Our holograms are used primarily for security
applications such as counterfeiting protection for credit and other transaction
cards, identification cards and documents of value, as well as for tamper
resistance and authentication of high-value consumer and industrial products.
Our ability to control the diffraction of light ("origination") using
proprietary processes in a secure, controlled manufacturing environment has
enabled us to become a market leader in security holography. Our products are
used by over 200 companies worldwide, including MasterCard, VISA, American
Express, Discover, Diners Club, Europay, Merck and Eli Lilly, as well as
agencies of the United States government and certain foreign governments. We
also produce non-secure holograms for packaging and promotional applications.
We believe we have a number of strengths that provide us with a competitive
advantage in the security sector of the holography industry, including:
- our reputation as a quality supplier of secure holograms with 18 years of
experience in the industry,
- our expertise in holographic technology and production and our extensive
patent portfolio,
- our origination laboratories, which enable us to produce distinctive
holograms with a variety of security features that make them difficult to
counterfeit, and
- our two efficient, ISO 9000 certified manufacturing facilities, which
allow us to mass produce high-quality holograms at a low cost in a secure
environment.
In January 1999, ABNH disclosed that its previously issued financial
statements for 1996, 1997 and the first three quarters of 1998 all required
restatement. This gave rise either directly or indirectly to several other
issues that were significant to ABNH. We have restated those financial
statements which are included in this Form 10-K, and we have devoted substantial
resources to address the various issues that arose from the need to restate
these financial statements.
THE HOLOGRAPHY INDUSTRY
A hologram is a laser-generated, three-dimensional reproduction of an
object, produced on a two-dimensional surface. A hologram controls the
diffraction of light at pre-determined angles to create specific visual imagery.
When a hologram is viewed from different angles, features such as depth and
movement, unseen in normal two-dimensional photographs, are seen by the viewer.
Holograms can also include information that is visible only with the aid of
special devices.
The holography market is divided into three main sectors: security,
promotion and packaging.
SECURITY
The security sector of the holography market includes credit and other
transaction cards, product authentication and documents of value. Holography,
combining art and science, allows each customer to develop its own unique
hologram with which to identify and protect its product. The secure hologram can
also incorporate certain covert data, which are only machine readable, about the
particular products shipped or purchased. Holograms provide the following major
benefits as security devices:
- the three-dimensional imagery, combined with the high degree of skill and
capital investment required to replicate holograms and various
proprietary hidden and visible security features, makes exact duplication
and replication of holograms on a mass-production basis extremely
difficult and presents obstacles to counterfeiting,
- the unique visual aspects of a hologram are easily recognizable, making
authentication of products and documents possible by both experts and
laymen without special machinery, equipment or training, and
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- the adhesives used to affix the hologram permanently to a product or a
document may be specially designed to make it readily apparent if there
is any attempt to remove or tamper with the hologram.
The security sector of the holography market includes:
Transaction Cards. In the early 1980's, we began marketing our secure
holograms for use on credit cards and, as a result, helped to create and expand
the security sector of the holography market. Since that time, the use of
holograms on credit cards and other transaction cards has continued to grow. The
most common examples of secure holograms are the distinctive MasterCard globes
and VISA dove found on their various credit and transaction cards. In recent
years, consumers demanding fast, convenient and secure methods of payment have
increasingly supplemented traditional payment systems such as checks and cash
with card-based payments, such as debit, credit and charge cards.
Product Authentication. The use of product authentication holograms is
driven by concerns regarding counterfeiting, piracy, pilfering, diversion and
other infractions that can result in lost sales, lost goodwill and product
liability claims. Holograms have gained increasing acceptance as authentication
devices in, among others, the electronics, pharmaceutical, licensed consumer
products (e.g., clothing, sporting goods and software) and entertainment event
marketing industries and in high value consumer and industrial products (e.g.,
laser printers, electronic components, computer hardware and software,
videocassettes and compact discs). Product authentication holograms are either
machine or hand-applied to individual products. A holographic label that is
tampered with can become permanently damaged, leaving a visible footprint on the
product. Customers distinguish hologram providers in the product authentication
sector of the holography market on the basis of security features offered,
secure production control capabilities and price.
Documents of Value. Concerns over counterfeiting and copying have led to
an increased use of holograms on documents of value, including currency,
passports, business cheques, gift certificates, vouchers, certificates of
deposit, stamps (postage and revenue), tickets and other financial instruments.
We believe that an increasing number of countries are using holograms in their
currencies and we expect the market for holograms on currency to continue to
grow.
PROMOTION
The unique visual appeal of holograms makes them attractive for use on
consumer products and for retail advertising. Promotional holography is used for
"short run," low-end products, including greeting cards, decorative clothing,
point-of-purchase displays, and for certain advertising. The manufacturing
processes utilized for the creation of promotional holograms are not as complex,
secure or proprietary as those used in creating security holograms. Competition
is based primarily on price, turn-around time, design and reliability.
PACKAGING
Holograms can also be used as ribbons and papers for gift-packaging and
paper and plastic wrapping for packaging of food and other products. These
lower-margin, commodity-type holograms are generally used on consumer product
packaging solely for their eye-catching appeal, including packaging for candy,
beer, toothpaste, soft-drinks and other consumer products. The manufacturing
processes utilized for the creation of packaging holograms are not as complex,
secure or proprietary as those used in creating security holograms. Customers
distinguish between suppliers primarily based upon quality, price and production
capacity.
STRATEGY
In 1999, we started to implement a strategy that included the following
components:
Build a New, Strong Management Team and Workforce. In 1999, ABNH's
Chairman and Chief Executive Officer, President and Chief Operating Officer, VP
Finance, Controller, and VP Operations all resigned from their positions with
ABNH. As a result, ABNH recruited the following persons to its management team:
Kenneth Traub, President; Salvatore D'Amato, Chairman; Russell LaCoste,
Executive Vice President of Corporate Development and Marketing; Alan Goldstein,
Chief Financial Officer; George Condos, Controller; and Peter Sorbo, Director of
Research and Development and Engineering. We also
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restructured operations to improve accountability and reduce expenses. We
believe that we have been successful in retaining our most important employees
and we have created a much stronger management team and organization. We intend
to continue to strengthen our organization.
Improve Capital Structure and Reduce Debt. At the time of its initial
public offering, ABNH had approximately $5.2 million of secured bank debt and
nominal cash. Following the disclosure of the need to restate its prior period
financial statements, ABNH was notified by its commercial bankers, led by The
Chase Manhattan Bank, that it was in default on its bank debt. In early 1999, we
implemented improved cost control and balance sheet management initiatives in
order to improve cash flow and reduce debt. We also negotiated an amendment to
the loan agreement with Chase which waived the existing defaults, and then
closed a refinancing with Foothill Capital Corporation, which enabled us to
repay the Chase facility and improve our capital structure. We believe that this
improvement to our capital structure gives us additional flexibility to invest
in the business for the long term.
Improve Operating Controls. We are in the process of implementing new
financial and manufacturing software to comply with Year 2000 issues and to
improve our management reporting capabilities. We believe these systems will
significantly improve the information available to management to manage the
business. We have also put in place new policies and procedures and changed
reporting relationships and responsibilities.
Reestablish Credibility Among Our Constituents and Within Our
Industry. This year, ABNH was under a great deal of scrutiny by concerned
customers, suppliers, employees, lenders, stockholders, lawyers, regulators and
others. We hope to reestablish our credibility through the continued execution
of the strategy described herein. We also hope to continue to enhance our
reputation in our industry through increased attention to product quality,
innovation and customer service.
Protect and Enhance Our Position in Our Core Transaction Card Business. We
hold a leadership position in the market for holograms on transaction cards as a
result of our relationships with companies such as MasterCard, VISA, Europay,
Diners Club and Discover. We have managed these relationships very closely in
1999, and hope to continue to strengthen them. This year we extended our
position in this market with a new relationship with American Express. We hope
to leverage our strong position and expertise in producing holograms for
transaction cards into other growth opportunities including identification
cards, product authentication and documents of value.
Develop New Products and Innovations. We have been a leading innovator in
the origination and mass production of secure holograms and we expect to
continue to emphasize the development of new technologies and products for our
target markets. Currently, we are seeking to develop higher resolution
holograms, new ways to increase the information stored on a hologram and
improvements to machine-readable features on our holograms. We are also
developing improvements to our products that have applications for tamper
apparent seals, bank notes (currency), personal identification documents and
other markets.
Develop New Market Opportunities. We have started to pursue new
applications and markets for our products. For instance, we believe there is an
increasing demand for holograms on bank notes, and we have started to develop
improved solutions that better meet the needs and requirements of this market.
Protect and Leverage Our Intellectual Property Position. We believe our
patent portfolio is very valuable and we intend to leverage our intellectual
property and patent rights. This year, we succeeded in persuading a competitor
to pay past due royalties in connection with a patent license agreement that we
had entered into previously. We intend to continue to protect our intellectual
property and enforce our patent rights.
Grow through Strategic Acquisitions. While much of our time during 1999
was spent on the issues described above, in 2000 we intend to pursue strategic
acquisitions that provide operating synergies or access to new customers or
technologies.
PRODUCTS
Our secure holography products can be grouped into three categories:
embossed holograms on hot stamp foils, pressure-sensitive labels and laminates.
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Embossed Holograms on Hot Stamp Foils. These holograms are designed for
permanent application to plastic (e.g., transaction cards), paper (e.g.,
currency) and other substrates through the application of heat and pressure to
the hologram. We use specific heat activated adhesives to ensure even bonding of
the hologram to the substrate, and the exposed side of the hologram is treated
with protective coatings to ensure durability and wear resistance. Our embossed
holograms on hot stamp foils also possess a degree of flexibility that helps
them to avoid problems such as cracking or flaking. Our customers for embossed
holograms on hot stamp foils include MasterCard, approved manufacturers of VISA
cards, American Express, Discover, Diners Club and Europay.
Pressure Sensitive Labels. These labels are designed to be applied using
pressure by hand or by machine to create a permanent bond to the intended
substrate. We have developed proprietary and patent pending features that make
tampering apparent. If removed, the label leaves a distinctive mark or pattern
and the removed material is unusable. The labels can be laser numbered or
ink-jet numbered for security, control and traceability. These labels are
designed primarily as a security device for branded merchandise, luxury goods
and pharmaceuticals. Our customers for pressure sensitive labels include 3M,
Merck, Eli Lilly, Playboy and Sony.
Laminates. Laminates are used primarily in identification products. We
have patented our method of making the hologram visible at specific angles and
invisible at other pre-determined angles. Our patented see-through, demetallized
product also protects the information on the identification document (card,
passport or paper credential) from alteration and provides additional security.
Fully metallized laminates are used on products such as hang tags for apparel,
"full face" transaction cards and magazine covers. Adhesives for laminates can
be formulated for application through both heat and pressure as well as pressure
only, depending upon the customer's specific requirements. Our customers for
laminates include the U.S. government, China and Colombia.
PRODUCTION PROCESS
We are one of the most experienced security production companies in the
holographic industry. We have two ISO certified security production facilities
containing a total of nine origination laboratories and 17 mass replication
lines as well as extensive security and quality control procedures. We also have
a large and sophisticated distribution network for secure holographic products.
Our production process is integrated to handle most aspects of production,
including raw materials sourcing, processing, finishing, packaging, storage and
logistics. From time to time, we subcontract certain production functions to
third parties. The production process consists of the following four steps:
DESIGN
The first step of the production process is the design of the hologram. In
the art department, our experienced personnel work with the customer to develop
a conceptual design that incorporates the necessary features, both security and
non-security, to satisfy the customer's requirements.
ORIGINATION
After the design has been completed, various laser-ready components
(magnetic floppy disc, three dimensional sculpture, flat art, etc., referred to
as "information") are delivered to one of our nine origination studios.
The conversion from information to hologram is based on our ability to
record light in an organized format. Coherent light, which is delivered by a
laser, is best understood as light which has one wavelength of the visible
spectrum and possesses a high degree of organization. The coherent light is
split into two beams (the object beam and the reference beam) directed toward
photo-resist treated glass. The object beam is interfered with by the
information before continuing its travel toward the photo-resist treated glass.
The reference beam is not interfered with and travels directly toward the
photo-resist treated glass.
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The object beam then interferes with the reference beam, creating an
interference pattern which is recorded on the light sensitive photo-resist
glass. After developing the photo-resist glass, the film is re-illuminated
approximating the original angle(s) of the reference beam. The resulting
interference pattern within the film reflects some of the light, striking it
into a re-creation of the pattern of light that originally came from the object
beam, due to a property of light called diffraction. The reflected light, now
organized and containing all information that the object beam once carried,
allows the viewer to see all of the information in three dimensions, true color
or with other desired effect.
There are less complex methods of creating a hologram origination than the
process described above. However, in our opinion, the above process produces the
clarity, depth perception, movement and mass replication properties that are
essential components of our secure holograms. We further believe that our
largest competitors in the security sector may use similar processes.
PLATE MAKING
Once the origination process is completed, a plate is created in order to
permit mass production. The "one-on" image is "step and repeated" to a
pre-determined size with multiple identical images recorded on a photo-resist
glass. The glass is then converted to a production plate in an electrolytic
process where nickel is grown on the surface of the glass. Nickel is used
because its molecular nature allows for an exact transfer of the origination to
the production plate. We believe that our proprietary plate making process is an
important component of our ability to mass produce our secure holograms.
The electrolytic process creates different "generations" of plates prior to
the production phase. Each generation, identical to the last, creates a more
wear resistant plate for use in a mass production environment, thereby extending
the useful life of the plate. The production plate will have varying degrees of
hardness, depending upon the processes used in production.
MASS PRODUCTION
Manufacturing specifications are determined in collaboration with the
customer. We and the customer typically enter into production planning where
drawings and overall specifications are written and distributed to the various
production and quality control departments.
We employ two methods of mass-production of holograms. Hard embossing
transfers images to an aluminum foil/polyester substrate through heat and
pressure. Heat and pressure on the holographic plate force the holographic image
into the foil, which is then converted into the final product.
The other method of production is In-Situ Polymeric Replication, which was
developed by us. Using this method, a polymer is transferred to a substrate
(polyester, polypropylene, etc.) which is then put in contact with the
holographic plate so that holographic imagery is replicated. The material is
then metallized using a vacuum deposition process.
Finishing for both methods may include some combination of demetallization,
application of adhesive, slitting, die-cutting and custom numbering. The
completed holographic material may then be applied to the customer's product.
RESEARCH AND PRODUCT DEVELOPMENT
We have devoted significant attention to research and product development
to continue to enhance our origination, replication and mass production
capabilities. Our R&D has enabled us to create new technologies and proprietary
production processes and to deliver innovative products to the marketplace.
Over the past several years, members of our staff have developed a number
of new products, including a tamper-apparent label and a tamper-apparent heat
seal laminate for use in identification card and passport products. We are
seeking to develop new ways to deliver higher resolution beyond what is
currently available in the security sector of the holography market.
Additionally, the development of machine-readable holograms has been a priority
for the research and product development department. Machine-readable technology
may
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enable holographic products to be compatible with optical bar code technology
for a variety of applications, including both simple product validation or
authentication and more sophisticated uses.
MANUFACTURING SUPPORT
The research and product development department assists the manufacturing
department in addressing various process and quality issues. Our research and
product development staff has also been involved in several manufacturing
process improvements, including the discovery of a means to increase
significantly the lifetime of nickel plate shims and the development of an
automated plate layout program that has reduced layout time from two weeks to
less than one day.
MANUFACTURING FACILITIES
See "Item 2. -- Properties."
SALES AND MARKETING
In 1998, we provided holographic products to over 200 customers worldwide.
We are the exclusive supplier of holograms to MasterCard and we believe we are
one of only two authorized manufacturers of VISA holograms for sale to approved
manufacturers of VISA cards. In addition, we supply holograms to American
Express, Diners Club, Discover, Europay and numerous other companies.
We currently employ an Executive Vice President of Corporate Development
and Marketing, a Vice President of Sales and Marketing, three full-time,
incentive-compensated salespeople and three sales service personnel. We also
utilize incentive-based international sales agents around the world.
All pricing decisions are made centrally by our operating executives. We
focus some of our marketing efforts on trade shows such as Expopak, the
International Holographics Manufacturers Association trade show, the
International Card Manufacturers Association trade show and the Card
Tech/SecurTech trade show. In the future, we intend to participate in security,
transaction card, brand protection, packaging, pharmaceutical, labeling and
document trade shows, both domestically and internationally.
COMPETITION
The holography industry is highly competitive and highly fragmented. A
number of our competitors are larger or are divisions of larger companies, and
have greater financial resources, than us. In the holography industry,
competition is generally based on technology, price, product quality and
customer service. We also compete with other non-holographic methods or devices.
We believe our position in the security sector of the holography market is
attributable to our technical expertise, years of experience and reputation in
the mass production of secure holograms.
TRADEMARKS AND PATENTS
We utilize a combination of patents, trade secrets and confidentiality
agreements, as well as restricted access and other forms of intellectual
property protection, to safeguard certain of our proprietary technology and
processes. We also hold certain trademarks with respect to certain products and
services. We currently hold approximately 35 U.S. patents and numerous foreign
patents, as well as patents pending and service marks that are used in our
business. We believe our patent portfolio is valuable and we intend to continue
to leverage the value of our intellectual property and patent rights.
There can be no assurance as to the degree of protection offered by our
patents, the success of any of our enforcement actions or the likelihood that
patents will be issued for pending applications. Competitors in the United
States and foreign countries may have applied for or obtained, or may in the
future apply for and obtain, patents that will prevent, limit or interfere with
our ability to make and sell some of our products.
In 1997, our United States patent numbers 4,728,377 and 4,913,504 (the
"Gallagher Patents"), which relate to a certain process for applying a hologram,
were invalidated by a U.S. federal court. While the
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invalidation of these U.S. patents does not prevent us from producing and
marketing any of our holograms, it does prevent us from asserting these patents
against parties that are making, selling and using the claimed inventions of
these patents solely in the United States. However, the corresponding foreign
patents remain valid and outstanding, and we believe they are important patents
in the international holographic industry. This year, we succeeded in persuading
a foreign competitor to pay us past due royalties in excess of $800,000 and to
resume paying royalties under a license agreement that we had entered into
previously relating to certain foreign counterparts of the Gallagher patents.
EMPLOYEES
As of December 15, 1999, we employed 94 persons, of which 57 are covered by
collective bargaining agreements. We consider our relations with our employees
to be good.
RISK FACTORS
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
In addition to other information in this Annual Report on Form 10-K, the
following risk factors should be carefully considered in evaluating us and our
business because such factors currently have a significant impact or may have a
significant impact on our business, operating results or financial condition.
This Form 10-K contains forward-looking statements that have been made pursuant
to the provisions of the Private Securities Litigation Reform Act of 1995.
Actual results could differ materially from those projected in the forward-
looking statements as a result of the risk factors set forth below and elsewhere
in this form.
WE ARE DEFENDING A CLASS ACTION LAWSUIT INITIATED BY SOME OF OUR
STOCKHOLDERS.
A consolidated class action complaint against ABNH, certain of its former
officers and directors, its former parent (American Banknote Corporation), the
four co-lead underwriters of our initial public offering and our auditors, has
been filed in the United States District Court for the Southern District of New
York. The complaint alleges violations of the federal securities laws and seeks
to recover damages on behalf of all purchasers of our common stock during the
class period (July 15, 1998 through February 1, 1999). The complaint seeks
recission of the purchase of shares of our common stock or alternatively,
unspecified compensatory damages, along with costs and expenses including
attorneys' fees. We and certain other defendants have separately moved to
dismiss the complaint. The plaintiffs' discovery requests as well as their
motion for class certification have been stayed pending resolution of the
respective motions to dismiss. We have commenced settlement discussions with
plaintiffs' counsel. We do not believe it is feasible to predict or determine
the outcome or resolution of these proceedings, or to estimate the amounts of,
or potential range of loss with respect thereto. In addition, the timing of the
resolution of these proceedings is uncertain. The range of possible resolutions
could include judgements against us or settlements that could require
substantial payments by us, including costs of defending such suits, which could
have a material adverse effect on our financial position, results of operations
and cash flows.
WE ARE BEING INVESTIGATED BY THE U.S. ATTORNEY'S OFFICE AND THE SECURITIES
AND EXCHANGE COMMISSION.
On February 9, 1999, the Division of Enforcement of the SEC issued a Formal
Order Directing Private Investigation, designating officers to take testimony
and requiring the production of certain documents, in connection with matters
giving rise to the need to restate our previously issued financial statements.
We have provided numerous documents to and continue to cooperate fully with the
SEC staff. We cannot predict the duration of such investigation or its potential
outcome.
The U.S. Attorney's Office for the Southern District of New York has
commenced an investigation in connection with matters giving rise to the need to
restate our previously issued financial statements, as well as a possible
violation in 1998 of the Foreign Corrupt Practices Act. We have not been advised
that we are a target of such investigation. We have provided numerous documents
to and continue to cooperate fully with the U.S. Attorney's Office. We cannot
predict the duration of such investigation or its potential outcome.
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OUR COMMON STOCK IS SUSPENDED FROM TRADING ON THE NEW YORK STOCK EXCHANGE
AND WILL NOT RESUME TRADING ON THE NYSE.
Our common stock was suspended from trading on the New York Stock Exchange
in August 1999. Following such suspension, the NYSE indicated that it will apply
to delist our common stock. Our common stock will not resume trading on the
NYSE, but we intend to seek to have our common stock traded on another stock
exchange or quoted on Nasdaq. Current pricing information on our common stock
has been available in the "pink sheets" published by National Quotation Bureau,
LLC. The "pink sheets" is an unorganized over-the-counter market which generally
provides significantly less liquidity than established stock exchanges or the
Nasdaq National Market, and quotes for stocks included in the "pink sheets" are
not listed in the financial sections of newspapers as are those for established
stock exchanges and the Nasdaq National Market. Therefore, prices for securities
traded solely in the "pink sheets" may be difficult to obtain, and our
stockholders may find it difficult to resell their shares. Until we are current
with our SEC filings, we are effectively unable to apply to list our common
stock or other securities with a national securities exchange or Nasdaq.
WE DEPEND ON CREDIT CARD MANUFACTURERS FOR A SUBSTANTIAL PORTION OF OUR
BUSINESS.
During 1998 and 1997, sales to credit card companies accounted for
approximately 70% and 75%, respectively, of our total sales, including
MasterCard and approved manufacturers of VISA brand credit cards, which together
accounted for approximately 56% and 62% of our total sales in 1998 and 1997,
respectively. If either MasterCard or VISA were to terminate its respective
relationship with us, or if we were to lose a substantial portion of our
business with either of these entities, there would be a material adverse effect
on our business, financial condition and results of operations. See
"Business -- Sales and Marketing." We provide holograms to MasterCard pursuant
to an agreement which expires in February 2003, subject to automatic renewal if
not terminated by either party. During 1999, MasterCard informed us that it
believes that ABNH breached certain terms of the agreement in 1997 and 1998. We
have been working closely with MasterCard to address issues raised by
MasterCard, and we believe our relationship with MasterCard is good.
Currently, we are one of two companies authorized to manufacture and sell
VISA brand holograms to manufacturers of VISA brand credit cards. There can be
no assurance that we can continue to successfully meet the needs of our
customers. In addition, failure to obtain anticipated orders or delays or
cancellations of orders or significant pressure to reduce prices from key
customers could have a material adverse effect on our future financial
performance.
WE DEPEND ON SINGLE SUPPLIERS FOR SOME KEY PRODUCT COMPONENTS.
We have historically purchased certain key materials used in the
manufacture of our holograms from single suppliers with which we do not have
supply contracts. Any problems that occur with respect to the delivery, quality
or cost of any such materials could have a material adverse effect on our
financial condition, results of operations and cash flows.
OUR MANAGEMENT TEAM IS NEW TO OUR COMPANY.
During 1999 we experienced substantial and significant turnover in our
senior management and our board of directors. Consequently, we have only
recently assembled our management team. The transition in management could have
an impact on our relationship with our employees, suppliers, customers and other
constituents.
RECENT EVENTS MAY CAUSE US TO LOSE EXISTING AND POTENTIAL CUSTOMERS AND
SUPPLIERS.
We have received inquiries from some of our customers and suppliers
relating to the previously disclosed adverse events affecting ABNH. Our
reputation has been adversely impacted and may continue to be affected by these
events. As a consequence, our relationships with existing customers and
suppliers may be strained. In addition, our ability to develop potential
customers or suppliers to maintain and grow our business may be adversely
affected.
8
<PAGE> 11
OUR QUARTERLY OPERATING RESULTS CAN FLUCTUATE.
Our future operating results are likely to fluctuate substantially from
quarter to quarter. Since a significant portion of our business is derived from
orders placed by a limited number of large customers, variations in the timing
of such orders could cause significant fluctuations in our operating results.
Other factors that may result in fluctuations in operating results include:
- customers' promotions,
- inventory replenishment,
- card expiration patterns,
- delivery schedules,
- changes in the cost of materials or labor,
- increased R&D expenses,
- competitive pricing pressures,
- legal and accounting fees associated with stockholder litigation,
government investigations and the restatement of our financial
statements, and
- financing costs.
WE ARE IN A COMPETITIVE, HIGHLY-FRAGMENTED INDUSTRY WITH MANY COMPANIES
COMPETING TO DELIVER A HIGHLY-SPECIALIZED PRODUCT.
The holography industry is highly competitive. Our competitors, which are
numerous and may have more resources than us, may take away market share or
compete with us on the basis of price, which may erode our prices and margins.
Increasing competition in the market for our security holograms has resulted in
declining sales prices for these products over the past few years.
Competition is based on a number of factors, such as:
- technology,
- price,
- product quality, and
- customer service.
In addition, an increased use of non-holographic methods or devices in place of
our products could reduce demand for our products. A number of competitors are
larger or are divisions of larger companies, and have greater financial
resources, than us.
WE HAVE RECENTLY IMPLEMENTED NEW INFORMATION AND ACCOUNTING SYSTEMS, AND WE
ARE STILL IMPLEMENTING ADDITIONAL IMPROVEMENTS TO OUR SYSTEMS.
We are in the process of implementing new financial and manufacturing
software to comply with Year 2000 issues and to improve our management reporting
capabilities. We believe these systems will significantly improve the
information available to management to manage the business. The implementation
of these new systems is time-consuming and expensive. Any problems that we have
in running these systems or that our employees have in adapting to these new
systems could materially and adversely affect our business, financial condition
and results of operations.
9
<PAGE> 12
OUR BUSINESS DEPENDS UPON OUR INTELLECTUAL PROPERTY WHICH MAY NOT BE
SUFFICIENTLY PROTECTED FROM INFRINGERS.
We utilize a combination of patents, trade secrets and confidentiality
agreements, as well as restricted access and other forms of intellectual
property protection, to safeguard certain of our proprietary technology and
processes. We also hold certain trademarks with respect to certain products and
services. We cannot be certain as to the degree of protection offered by any of
our patents or as to the likelihood that patents will be issued for any of our
pending applications. There can be no assurance that we will be able to maintain
the confidentiality of our trade secrets or that our confidentiality agreements
will provide meaningful protection of our trade secrets or other proprietary
information. See "Business -- Trademarks and Patents."
In addition, litigation may be necessary in the future to enforce our
intellectual property rights or to determine the validity and scope of our
patents or of the proprietary rights of others. Such litigation might result in
substantial costs and diversion of resources and management attention.
Furthermore, our business activities may infringe upon the proprietary rights of
others, and in the past third parties have claimed, and may in the future claim,
infringement by our products. Any such claims, with or without merit, could
result in significant litigation costs and diversion of management attention,
and could require us to enter into royalty and license agreements that may be
disadvantageous to us or suffer other harm to our business. If litigation is
successful against us, it could result in invalidation of our proprietary rights
and liability for damages, which could have a harmful effect on our business.
WE MAY BE SUBJECT TO SIGNIFICANT PRODUCT LIABILITY IN CONNECTION WITH THE
PRODUCTS WHICH WE PROVIDE TO OUR CUSTOMERS.
We provide holograms in connection with a wide range of our customers'
products, in which case it is possible that we are subjecting ourselves to
product liabilities in association with those products or in connection with the
holograms used with those products. Although we maintain product liability
insurance, there can be no assurance that such insurance would be available to
cover any such claim or available in amounts sufficient to cover all potential
liabilities. As a result, product liability claims could have a material adverse
effect on our business, financial condition and results of operations.
SINCE A SIGNIFICANT PERCENTAGE OF OUR SALES ARE DERIVED FROM OVERSEAS
CUSTOMERS, OUR EXPORTS AND BUSINESS MAY BE SUBJECT TO SOME RISKS RELATED TO
DOING BUSINESS INTERNATIONALLY.
In 1998 and 1997, 28% and 25%, respectively, of our sales were derived from
customers outside the United States. All export sales are denominated in U.S.
dollars. International sales are subject to risks, including:
- United States and international regulatory requirements and policy
changes,
- political and economic instability,
- difficulties in accounts receivable collection,
- tariffs and other barriers, and
- difficulty in attracting, retaining and managing international
representatives.
We cannot be certain that any of these factors will not have a material adverse
effect on our business, financial condition or results of operations. See "Item
7. -- Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OUR BUSINESS IS SUBJECT TO ENVIRONMENTAL REGULATION AND IS ALWAYS SUBJECT
TO ENVIRONMENTAL LIABILITY.
Our operations are subject to federal, state and local environmental laws
and regulations. If we fail to comply with applicable rules and regulations, we
could be subject to monetary damages and injunctive action, which could
materially and adversely affect our business, financial condition or results of
operations. We believe that we are currently in material compliance with
applicable laws and regulations. However, to the
10
<PAGE> 13
extent future laws and regulations are adopted or interpretations of existing
laws and regulations change, new requirements may be imposed on our future
activities or may create liability retroactively.
OUR FORMER PARENT COMPANY, ABN, HAS EXPERIENCED FINANCIAL DIFFICULTY DURING
1999, AND WE MAY HAVE RISKS ASSOCIATED WITH ABN'S POTENTIAL INABILITY TO
PAY ITS OBLIGATIONS TO US AND TO THIRD PARTIES.
Our former parent company, ABN, has experienced financial difficulty during
1999. On December 8, 1999, ABN filed a petition and plan of reorganization in
federal bankruptcy court pursuant to Chapter 11 of the U.S. Bankruptcy Code. The
petition seeks approval for a financial restructuring resulting in the
cancellation of certain of ABN's outstanding indebtedness in exchange for equity
in ABN as well as the amendment of the repayment terms of certain other
outstanding indebtedness of ABN. The petition does not seek to affect ABN's
trade obligations or payables in the ordinary course.
In connection with our IPO, we entered into a number of agreements with ABN
that require ABN to indemnify us under certain circumstances. However, ABN's
financial difficulty may result in its inability to indemnify us. In addition,
we are co-defendants with ABN in some ongoing litigation in which we could be
held jointly and severally liable along with ABN. In such an event the
plaintiffs may be unable to collect any money from ABN and may instead attempt
to pursue collection from us. For more details on this litigation, see "Item
3. -- Legal Proceedings." Any inability of ABN to indemnify us or to pay any
liabilities for which we are jointly and severally liable could have a material
adverse effect on our financial position, results of operations and cash flows.
WE CURRENTLY HAVE NO INTENTION OF PAYING DIVIDENDS AND ANY DIVIDENDS WE MAY
PAY WILL DEPEND ON CERTAIN FACTORS.
We intend to retain all earnings, if any, for use in our business. We do
not anticipate paying cash dividends in the foreseeable future.
SHARES CURRENTLY HELD BY STOCKHOLDERS MAY BE SUBJECT TO DILUTION DUE TO THE
POTENTIAL ISSUANCE OF PREFERRED STOCK.
Our certificate of incorporation permits the issuance of up to 5,000,000
shares of preferred stock and permits the board of directors to fix the rights,
preferences, privileges and restrictions of such shares without any further vote
or action by our stockholders. Although we have no current plans to issue shares
of preferred stock, the potential issuance of preferred stock may have the
effect of:
- delaying, deferring or preventing a change in control of our company,
- may discourage bids for the common stock at a premium over the market
price of the common stock, and
- may adversely affect the market price of, and the voting and other rights
of the holders of the common stock.
WE REMAIN VULNERABLE TO YEAR 2000 COMPLIANCE PROBLEMS IN OUR SYSTEMS AND
THOSE OF OUR SUPPLIERS AND CUSTOMERS, WHICH COULD POTENTIALLY DISRUPT OUR
OPERATIONS AND MAY REQUIRE GREATER THAN ANTICIPATED REMEDIAL EXPENSES.
We are preparing for the impact of the Year 2000 on our operations. Year
2000 issues could include potential problems in our information technology and
other systems that we use in our operations. Year 2000 system failures could
affect routine but critical operations such as forecasting, purchasing,
production, order processing, inventory control, shipping and billing and
collections. In addition, system failures could affect security, payroll
operations and employee safety. Third parties who fail to adequately address
their own Year 2000 issues could also expose us to potential risks.
Systems and applications that we have identified to date as not currently
being Year 2000 compliant include financial software systems (which process
order entry, purchasing, production management, general
11
<PAGE> 14
ledger, accounts receivable, accounts payable functions, and payroll
applications) and critical applications in our manufacturing facilities. We have
completed the inventory and verification of the Year 2000 readiness of
computer-controlled manufacturing equipment and computer controls for our
manufacturing and office facilities, and we have completed our assessment of the
Year 2000 remediation efforts of our suppliers and customers where there is a
significant business relationship. We expect to complete the conversion or
replacement of the computer information systems for our entire business
operations by December 31, 1999. Our failure to complete our Year 2000
compliance work in a timely manner and the failure of our third-party suppliers
and customers to become Year 2000 compliant could have a material adverse impact
on our business, financial condition and results of operations.
At this time, we believe that the most likely "worst case" scenario
relating to Year 2000 involves the loss of utility service, rendering us unable
to manufacture and distribute. We have developed a contingency plan that
includes such precautionary measures as managing inventory levels, the
deployment of manual systems, the use of alternate computer software that we
currently own and using outside contractors. At this time, however, we cannot
currently estimate either the likelihood or potential adverse impact of such
failures.
We currently estimate that the total cost of addressing and remedying Year
2000 issues and enhancing our operating systems will be approximately $425,000,
which does not include internal costs associated with our Year 2000 remediation.
Our internal costs associated with our Year 2000 remediation are being expensed
as incurred, and have not been material to our past performance and are not
expected to be material relative to our future performance. No funds were
expended related to our Year 2000 remediation during 1998. Through October 31,
1999, approximately $380,000 was expended and approximately $45,000 will be
expended during the period November 1, 1999 through December 31, 1999 in
connection with the remediation and testing of our computer systems. Our current
estimates of the amount of costs and time necessary to remediate and test our
computer systems are based on the facts and circumstances existing and known at
this time. These estimates were made using assumptions of future events
including the continued availability of certain resources, implementation
success by key third parties and other factors.
See "Item 7. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Readiness Disclosure" for more details of
our Year 2000 assessment and compliance efforts.
ITEM 2. PROPERTIES.
We maintain secure hologram manufacturing facilities in Elmsford, New York
and Huntingdon Valley, Pennsylvania. We believe that our existing facilities are
adequate to meet our current requirements and that additional suitable space
will be available as needed.
Our 57,200 square foot facility at Elmsford, New York serves as our
headquarters and includes our art department, origination facilities, plate
making facilities and the manufacturing site for the mass production of numerous
holographic products. Our origination facilities include nine laser
laboratories.
Our 30,000 square foot facility at Huntingdon Valley, Pennsylvania is
dedicated to the mass production of security holograms primarily for transaction
cards.
Both facilities are constantly monitored for security, and have uniformed
security personnel on site, 24 hours a day, seven days a week. The Director of
Security is responsible for the physical security of both facilities, access and
egress, monitoring employee integrity, and safeguarding of machinery, materials,
work-in-process and finished product until shipping. The security department
witnesses material destruction and supervises the transfer of security
shipments. Each facility is equipped with full perimeter alarms enhanced by
window glass break sensors, internal motion detectors and closed circuit video
monitoring of security sensitive areas.
ITEM 3. LEGAL PROCEEDINGS.
On February 9, 1999, the Division of Enforcement of the SEC issued a Formal
Order Directing Private Investigation, designating officers to take testimony
and requiring the production of certain documents, in
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<PAGE> 15
connection with matters giving rise to the need to restate ABNH's previously
issued financial statements. We have provided numerous documents to and continue
to cooperate fully with the SEC staff. We cannot predict the duration of such
investigation or its potential outcome.
The U.S. Attorney's Office for the Southern District of New York has
commenced an investigation in connection with matters giving rise to the need to
restate our previously issued financial statements, as well as a possible
violation in 1998 of the Foreign Corrupt Practices Act. We have not been advised
that ABNH is a target of such investigation. We have provided numerous documents
to and continue to cooperate fully with the U.S. Attorney's Office. We cannot
predict the duration of such investigation or its potential outcome.
A consolidated class action complaint against ABNH, certain of its former
officers and directors, ABN, the four co-lead underwriters of our IPO and our
auditors, has been filed in the United States District Court for the Southern
District of New York. The complaint alleges violations of the federal securities
laws and seeks to recover damages on behalf of all purchasers of our common
stock during the class period (July 15, 1998 through February 1, 1999). The
complaint seeks rescission of the purchase of shares of our common stock or
alternatively, unspecified compensatory damages, along with costs and expenses
including attorneys' fees. We and certain other defendants have separately moved
to dismiss the complaint. The plaintiffs' discovery requests as well as their
motion for class certification have been stayed pending resolution of the
respective motions to dismiss. We have commenced settlement discussions with
plaintiffs' counsel. We do not believe it is feasible to predict or determine
the outcome or resolution of these proceedings, or to estimate the amounts of,
or potential range of loss with respect thereto. In addition, the timing of the
resolution of these proceedings is uncertain. The range of possible resolutions
could include judgements against us or settlements that could require
substantial payments by us, including costs of defending such suits, which could
have a material adverse effect on our financial position, results of operations
and cash flows.
On February 14, 1997, James Rigby, Trustee in Bankruptcy for Holosonics,
Inc., Holotron Corp., Meadows Games, Inc. and Fire Diamond, Inc. commenced an
adversary proceeding in the United States Bankruptcy Court for the Western
District of Washington at Seattle against International Banknote Company, Inc.,
ABN and us. The complaint alleged that the defendants were indebted to the
bankruptcy estate for royalty payments under a 1981 license and that we were
liable for unpaid royalties for 1990 in the amount of $226,322, for 1991 in the
amount of $853,582 and through July 1992 in the amount of $568,762, plus
attorney's fees and interest on unpaid amounts. The defendants and Trustee
entered into a settlement agreement which was approved by an order of the
bankruptcy court on September 10, 1999, whereby the defendants agreed to pay the
Trustee $150,000, of which $135,000 has been paid with the balance of $15,000
payable one-hundred twenty days following entry of the order. The full amount of
the settlement has been accrued at December 31, 1998.
In 1994, plaintiffs, K.A.H. Company, Inc. and Kenneth A. Haines, filed suit
against us, ABN and ABNH Research Co., Inc. in the Supreme Court of the State of
New York, County of New York. A judgment was entered on March 19, 1999 for
$175,639, with attorneys' fees still to be assessed. Plaintiffs' counsel has
stated that he would seek in excess of $300,000 in attorneys' fees. Such
judgment was entered only against ABN, which contends that we should contribute
to the payment of the judgment. The defendants have appealed and the plaintiffs
have filed a cross-appeal, both of which are still pending. The plaintiffs and
defendants are currently engaged in settlement discussions.
On August 17, 1999, we commenced an action in the Supreme Court of the
State of New York, County of Westchester, seeking recovery of approximately
$350,000 on a claim arising from amounts owed to us for holographic materials
sold and delivered in July 1999. The defendant removed the action to the United
States District Court for the Southern District of New York, where it is
currently pending. On December 1, 1999, we received the defendant's answer to
our complaint and counterclaims alleging millions of dollars in damages arising
from ABNH's alleged breach of a 1993 agreement pursuant to which ABNH sold
holographic material to the defendant and alleged failure to fulfill a May 1998
purchase order. We do not believe that the outcome or resolution of these
proceedings will have a material adverse effect on our financial position,
results of operations or cash flows.
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<PAGE> 16
In 1998, ABNH fulfilled an order for holograms for approximately $600,000.
In 1999, the customer alleged that ABNH breached its contract with such customer
based on problems that the ultimate user was experiencing with the holograms,
and claimed potential damages in excess of $6 million. We do not believe that
the agreement was breached, and we are in discussions with this customer in an
attempt to resolve this dispute amicably. There can be no assurance, however,
that this matter will be resolved amicably, or that this dispute will not lead
to litigation with the customer.
We currently and from time to time are involved in litigation (as both
plaintiff and defendant) incidental to the conduct of our business; however,
other than the shareholder litigation described above, we are not a party to any
lawsuit or proceeding which, in our opinion, is likely to have a material impact
on our financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock was traded on the New York Stock Exchange under the symbol
"ABH" from the time of our initial public offering on July 15, 1998 to August 3,
1999, when trading in our common stock was suspended. The following table sets
forth the high and low closing prices of our common stock for each quarter of
1998 and 1999 during which it traded on the NYSE.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1998
Third Quarter (from July 15, 1998).......................... $ 8.56 $4.88
Fourth Quarter.............................................. 18.00 5.81
1999
First Quarter............................................... $17.00 $1.63
Second Quarter.............................................. 3.88 2.06
Third Quarter (through August 2, 1999)...................... 3.06 1.63
</TABLE>
Our common stock was suspended from trading on the NYSE on August 3, 1999
because we had not filed our annual report for the year ended December 31, 1998
or our quarterly report for the quarter ended March 31, 1999 within the SEC's
prescribed time period. Following such suspension, the NYSE indicated that it
would apply to delist our common stock. In the interim, our common stock has
been traded in the over-the-counter market.
The following table sets forth the high and low closing prices of our
common stock for each quarter of 1999 during which it has traded on the
over-the-counter market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1999
Third Quarter (from August 3, 1999)......................... $3.06 $1.25
Fourth Quarter (through December 15, 1999).................. $3.05 $1.50
</TABLE>
The price of our common stock has been quoted on the "pink sheets"
published by the National Quotation Bureau, LLC (ticker symbol: "ABHH"). The
"pink sheets" is an unorganized over-the-counter market which provides
significantly less liquidity than established stock exchanges or the Nasdaq
National Market, and quotes for stocks included in the "pink sheets" are not
listed in the financial sections of newspapers as are those for established
stock exchanges and the Nasdaq National Market.
As of December 15, 1999, there were approximately 60 holders of record of
our common stock. Because many of our shares of common stock are held of record
by brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of beneficial stockholders represented by these record
holders.
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<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(AS RESTATED -- SEE NOTE 1)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales.................................... $21,900 $27,865 $27,516 $23,085 $28,669
Costs and expenses:
Cost of goods sold.................. 14,141 13,787 14,710 12,153 19,064
Selling and administrative.......... 4,673 4,576 4,711 5,813 6,291
Depreciation and amortization....... 1,066 1,203 1,141 1,136 1,080
------- ------- ------- ------- -------
19,880 19,566 20,562 19,102 26,435
------- ------- ------- ------- -------
Operating income....................... 2,020 8,299 6,954 3,983 2,234
Other income........................... 244 113 196 821 554
Interest, net.......................... 305 305 305 146 (400)
------- ------- ------- ------- -------
Income before taxes on income.......... 2,569 8,717 7,455 4,950 2,388
Taxes on income........................ 1,198 3,663 3,117 2,130 1,269
------- ------- ------- ------- -------
Net income............................. $ 1,371 $ 5,054 $ 4,338 $ 2,820 $ 1,119
======= ======= ======= ======= =======
Net income per share:
Basic and diluted...................... $ 0.10 $ 0.37 $ 0.32 $ 0.21 $ 0.08
Weighted average shares outstanding:
Basic.................................. 13,636 13,636 13,636 13,636 13,636
Diluted................................ 13,636 13,636 13,636 13,636 13,701
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS)
(AS RESTATED -- SEE NOTE 1)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $10,426 $11,208 $ 9,431 $ 8,684 $ 2,023
Total assets........................... 30,329 29,366 27,742 27,515 30,820
Total debt............................. -- -- -- 674 5,968
Total stockholders' equity............. 26,513 25,452 22,434 21,165 14,530
</TABLE>
- ---------------
(1) The financial data as of and for the years ended December 31, 1997 and 1996
have been restated as described in Note 11 to the Financial Statements. As
of December 31, 1994, retained earnings have been reduced by approximately
$278,000, net of applicable income taxes, for the effects of certain
overbillings during 1991 through 1994. Additionally, during the year ended
December 31, 1994, sales and net income have been reduced by approximately
$60,000 and $35,000, respectively, for the effects of this overbilling.
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
"Item 6. -- Selected Financial Data" and our financial statements, including the
notes thereto, appearing elsewhere in this report.
On January 19, 1999, ABNH announced that the audit committee of its board
of directors initiated an investigation into circumstances that gave rise to the
need to restate prior period financial statements. The audit committee's
investigation has since been completed, and, as a result of its findings, ABNH
has restated its previously issued financial statements for 1996, 1997 (see Note
11 to the financial statements) and the first three quarters of 1998. The
effects of the restatement are presented in Note 11 to the financial statements
and have been reflected herein.
OVERVIEW
ABNH was, until July 20, 1998, a wholly-owned subsidiary of ABN. On that
date, ABN completed the sale of 13,636,000 shares of our common stock in a
public offering, representing ABN's entire investment in ABNH. We did not
receive any proceeds from the IPO. Additionally, in connection with the IPO, the
amounts due from ABN and affiliates of approximately $33.9 million were
cancelled and deemed to be a dividend. Immediately following our IPO, we had
approximately $5.2 million of secured bank debt and nominal cash. As a
wholly-owned subsidiary, we were provided certain corporate and administrative
services by ABN, including financial reporting, treasury functions, tax planning
and compliance, risk management, human resources and legal services.
Additionally, because ABN managed cash and financing requirements centrally,
interest expense and financing requirements prior to the IPO were based on the
existing capital structure. Our results prior to the IPO might have differed
from the results that might have been achieved had we operated as an independent
entity.
ABNH originates, mass-produces and markets holograms. Our holograms are
used primarily for security applications such as counterfeiting protection for
credit and other transaction cards, identification cards and documents of value,
as well as for tamper resistance and authentication of high-value consumer and
industrial products. Our ability to control the diffraction of light
("origination") using proprietary processes in a secure, controlled
manufacturing environment has enabled us to become a market leader in security
holography. Our products are used by over 200 companies worldwide. We also
produce non-secure holograms for packaging and promotional applications. Our
sales of holograms for credit card security applications generally carry higher
gross margins than sales for other applications.
Concerns regarding counterfeiting, piracy and other infractions that can
result in lost sales, lost goodwill and product liability claims drive the use
of product authentication holograms. Companies in various industries have
utilized holograms as authentication devices to reduce potential losses. Also,
concerns over counterfeiting and copying have led to an increased use of
holograms on documents of value, including currency, passports, business
cheques, gift certificates, vouchers, certificates of deposit, stamps (postage
and revenue), tickets and other financial instruments.
Our sales are derived from the sale of our security and commercial
holograms. In 1998, we derived approximately 95% of our sales from security
applications and approximately 5% from commercial applications. A significant
portion of our business was derived from orders placed by a limited number of
large customers, and variations in the timing of such orders can cause
significant fluctuations in our sales.
We are currently dependent on certain credit card companies for a
substantial portion of our business, including MasterCard and manufacturers of
VISA brand credit cards. Sales to MasterCard were approximately 30%, 35%, and
23%, respectively, and sales to Visa card manufacturers were approximately 26%,
27%, and 31%, respectively, of sales for the years ended December 31, 1998, 1997
and 1996. We are the exclusive supplier of holograms to MasterCard pursuant to
an agreement, as amended, that extends until February 2003. The agreement
provides for automatic two-year renewal periods if not terminated by either
party. During 1999, we were informed by MasterCard that it believes that we
breached certain terms of the agreement in 1998 and 1997. We have been working
closely with MasterCard to address issues raised by MasterCard, and
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<PAGE> 20
believe our relationship with MasterCard is good. We do not have long-term
purchase contracts with VISA and we supply holograms to approximately 50 VISA
authorized card manufacturers pursuant to purchase orders. Currently we are one
of two companies authorized to manufacture and sell VISA brand holograms to
manufacturers of VISA brand credit cards. If either MasterCard or VISA were to
terminate its respective relationship with us or substantially reduce their
orders, there would be a material adverse effect on our business, financial
condition, results of operations and cash flows.
Holograms are sold under purchase orders and contracts with customers.
Sales and the related cost of goods sold are generally recognized at the latter
of the time of shipment or when title passes to customers. In some situations,
we have shipped product with the right of return where we are unable to
reasonably estimate the level of returns and/or the sale is contingent upon the
customers' use of the product. In these situations, we do not recognize sales
upon product shipment, but rather when the buyer of the product informs us that
the product has been used. Additionally, pursuant to terms with a certain
customer, completed items are stored on behalf of the customer at our on-site
secured facility and, in that instance, sales are recognized when all of the
following have occurred: the customer has ordered the goods, the manufacturing
process is complete, the goods have been transferred to the on-site secured
facility and are ready for shipment, the risk of ownership has passed to the
customer and the customer has been billed for the order. During the first
quarter of 1998, we recorded sales of approximately $6.5 million under this
arrangement.
We have historically purchased certain key materials used in the
manufacture of our holograms from single suppliers, with which we do not have
supply contracts. Any problems that occur with respect to the delivery, quality
or cost of any such materials could have a material adverse effect on our
financial position, results of operations and cash flows.
During 1998, 1997 and 1996, export sales accounted for approximately 28%,
25% and 32%, respectively, of total sales. All of our export sales are presently
denominated in U.S. dollars.
Cost of goods sold includes raw materials such as nickel, foils, films and
adhesives; labor costs; manufacturing overhead; and hologram origination costs
(which represent costs of a unique master hologram that is made to customer
specifications and is an integral part of the production process). As a result,
costs of goods sold are affected by product mix, manufacturing yields, costs of
hologram originations and changes in the cost of raw materials and labor.
Selling and administrative expenses primarily consist of salaries, benefits
and commissions for our corporate, sales, marketing and administrative personnel
and marketing and advertising expenses for our services and products.
Sales may fluctuate from quarter to quarter due to changes in customers'
ordering patterns. Customers do not typically provide us with precise forecasts
of future order quantities. Quarterly demand for holograms may be materially
influenced by customers' promotions, inventory replenishment, card expiration
patterns, delivery schedules and other factors which may be difficult for us to
anticipate.
In accordance with a tax allocation agreement in effect through the date of
our IPO, we were included in the consolidated U.S. Federal income tax return
and, in certain instances, consolidated or combined state and local income tax
returns of ABN and made payments to ABN based on the amounts which would be
payable as Federal, state and local income taxes as if consolidated or combined
returns were not filed. We computed our Federal, state and local income tax
provision as if we were filing separate income tax returns, without regard to
the tax allocation agreement. In October 1999, an affiliate of ABN received an
assessment for approximately $0.9 million of taxes and interest from the City of
New York relating to the years ended December 31, 1990, 1991 and 1992. We were
included in the combined City of New York income tax returns of ABN for the
periods covered by the assessment and had previously made payments to ABN based
on amounts which would have been payable if the combined income tax returns were
not filed. We are contingently liable, jointly and severally, for U.S. Federal,
state and local income taxes for periods in which we are included in the
consolidated or combined income tax returns of ABN. Amounts paid to ABN in
excess of amounts which would have been payable had we filed separate tax
returns have been charged to Due from
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<PAGE> 21
Former Parent and affiliates. For periods subsequent to our IPO, we will file
our own U.S. Federal and state income tax returns.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31,
1997
Sales. Sales increased by $5.6 million, or 24.2%, from $23.1 million in
1997 to $28.7 million in 1998. The increase in sales was due primarily to an
increase in sales of security holograms for credit cards of $2.9 million and
other security holograms of $2.7 million. Sales in the fourth quarter of 1998
were impacted by approximately $3.0 million in sales (including the sale of
goods originally shipped on consignment) at discounts from normal selling prices
in exchange for immediate payment. We believe that, in the absence of such
discounts, a portion of these sales would have occurred in 1999; therefore, it
is anticipated that sales, related gross margins and net income will be
adversely affected in the first quarter of 1999. The contractual net unit sales
price applicable to MasterCard was reduced in September 1998 by approximately
5%. At December 31, 1998, we had customer advances approximating $1.5 million
which represented payments received from customers for products, at a discount
from the normal sales price in exchange for immediate payment, which have not
yet been shipped ($1.2 million) and for products shipped with the right of
return ($0.3 million) where we are unable to reasonably estimate the level of
returns. We anticipate that sales will be recognized in 1999 from these
transactions.
Cost of Goods Sold. Cost of goods sold increased by $6.9 million, or
56.6%, from $12.2 million in 1997 to $19.1 million in 1998. As a percentage of
sales, cost of goods sold increased from 52.8% in 1997 to 66.6% in 1998. This
increase reflects increases in the amortization of origination costs (which are
charged to costs of goods sold based on the total number of holographic images
estimated to be produced) due to lower volumes of sales than had been originally
estimated (5%), increases in origination costs which were incurred in
anticipation of orders which did not materialize (5%), increased provisions for
obsolete and excess inventory due primarily to quality considerations and lower
of cost or market adjustments (7%), the effects on gross margin of the sales
discounts referred to above (1%), an increase in warranty expense (1%), and
increases in royalty expenses (2%), offset by an increase in the gross margins
on our sales mix (7%).
Selling and Administrative Expenses. Selling and administrative expenses
increased by $0.5 million, from $5.8 million in 1997 to $6.3 million in 1998. As
a percentage of sales, selling and administrative expenses decreased from 25.1%
in 1997 to 22.0% in 1998. The increase in expenses is primarily attributable to
increased sales commissions of $0.4 million relating to the increase in sales,
increased administrative salaries of $0.2 million relating to new hires and
salary increases, and increased costs relating to shareholder communications and
other costs associated with public ownership of $0.4 million, offset by a
decrease in provisions for bad debts of $0.4 million.
Depreciation and Amortization. Depreciation and amortization remained
relatively unchanged in 1998 compared to 1997. As a percentage of sales,
depreciation and amortization decreased from 4.9% in 1997 to 3.8% in 1998.
Other Income. Other income decreased by $0.2 million from $0.8 million in
1997 to $0.6 million in 1998. This decrease in other income was primarily due to
a change in 1997 in the estimate of 1996 royalties resulting from information
not reported by a licensee until 1997.
Interest, net. Interest, net decreased by $0.5 million from $0.1 million
in net income in 1997 to $0.4 million net expense in 1998. This decrease was due
to increased interest expense under the revolving credit facility of $0.4
million and a reduction in interest income from ABN of $0.1 million as a result
of the cancellation of the $5.3 million note receivable from ABN that bore
interest at 5.75% per annum, which was included in the deemed dividend discussed
above.
Income Taxes. Income taxes for periods prior to the IPO are based on taxes
that would have been paid had we operated on a stand-alone basis. Income taxes
decreased by $0.8 million, from $2.1 million in 1997 to $1.3 million in 1998, as
a result of lower taxable income due to the factors described above. For a
reconciliation of income taxes from the federal statutory rate to our effective
rate, see Note 5 to our financial statements.
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<PAGE> 22
Net Income. As a result of the foregoing, net income decreased by $1.7
million, or 60.7%, from $2.8 million in 1997 to $1.1 million in 1998.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
Sales. Sales decreased by $4.4 million, or 16.0%, from $27.5 million in
1996 to $23.1 million in 1997. The decrease in sales was due primarily to a
decrease in commercial hologram sales of $2.2 million and a decrease of $2.2
million in sales of security holograms for credit cards.
Cost of Goods Sold. Cost of goods sold decreased by $2.5 million, or
17.0%, from $14.7 million in 1996 to $12.2 million in 1997. As a percentage of
sales, cost of goods sold decreased from 53.5% in 1996 to 52.8% in 1997.
Selling and Administrative Expenses. Selling and administrative expenses
increased by $1.1 million, or 23.4%, from $4.7 million in 1996 to $5.8 million
in 1997. As a percentage of sales, selling and administrative expenses increased
from 17.1% in 1996 to 25.1% in 1997. This increase in selling and administrative
expenses was due primarily to a bad debt charge of $800,000 associated with a
product development project. In addition, approximately $300,000 of expenses
were incurred in 1997 in connection with our ISO 9000 certification.
Depreciation and Amortization. Depreciation and amortization remained
relatively unchanged from 1996 to 1997. As a percentage of sales, depreciation
and amortization increased from 4.1% in 1996 to 4.9% in 1997.
Other Income. Other income increased by $0.6 million from $0.2 million in
1996 to $0.8 million in 1997. This increase was primarily due to a change in
1997 in the estimate of 1996 royalties resulting from information not reported
by a licensee until 1997.
Interest, net. Interest, net, decreased by $0.2 million from $0.3 million
in 1996 to $0.1 million in 1997 as a result of interest on the revolving credit
facility. Interest income in both years represents interest on a note due from
ABN.
Income Taxes. Income taxes for periods prior to the IPO are based on taxes
that would have been paid had we operated on a stand-alone basis. Income taxes
decreased by $1.0 million from $3.1 million in 1996 to $2.1 million in 1997, as
a result of lower taxable income due to the factors described above. For a
reconciliation of income taxes from the federal statutory rate to our effective
rate, see Note 5 to our financial statements.
Net Income. As a result of the foregoing, net income decreased by $1.5
million, or 34.9%, from $4.3 million in 1996 to $2.8 million in 1997.
SEASONALITY
Our sales have not generally exhibited substantial seasonality. However,
our sales and operating results to date have, and future sales and therefore
operating results may, continue to fluctuate from quarter to quarter. The degree
of fluctuation will depend on a number of factors, including the timing and
level of sales, any change in the pricing of our products and the mix of
products sold. Because a significant portion of our business is expected to be
derived from orders placed by a limited number of large customers, variations in
the timing of such orders could cause significant fluctuations in our operating
results. Customers do not typically provide us with precise forecasts of future
order quantities. Quarterly demand for holograms may be materially influenced by
customers' promotions, inventory replenishment, card expiration patterns,
delivery schedules and other factors which may be difficult for us to
anticipate. Other factors that may result in fluctuations in operating results
include the timing of new product announcements and the introduction of new
products and new technologies by us or our competitors, delays in research and
development of new products, increased R&D expenses, availability and cost of
materials from our suppliers, competitive pricing pressures and financing costs.
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<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, we had $4.3 million in cash and cash equivalents and
working capital of $2.0 million. This cash balance included cash generated from
sales in the fourth quarter of 1998 at a discount from the normal sales price in
exchange for immediate payment and from customer advances, as well as the
effects of an increase in accounts payable. A substantial portion of this cash
was subsequently utilized for repayments under our revolving credit agreement,
the payment of trade payables, and for costs relating to the audit committee
investigation discussed above. We estimate that the total amount to be expended
in connection with the audit committee investigation and related restatement
efforts will approximate $4.0 million. These costs will be charged to operations
as incurred and will adversely impact 1999 operating results and cash flows. At
September 30, 1999, we had $1.0 million of cash and cash equivalents, $2.3
million payable under our revolving credit agreement with Foothill Capital
Corporation and no further availability under the borrowing base formula of our
revolving credit agreement.
On July 20, 1998, contemporaneously with our IPO, we entered into a $30.0
million credit facility agreement, consisting of a $20.0 million acquisition
facility and a $10.0 million working capital facility, maturing on July 20,
2004, which replaced a facility we had entered into with an affiliate of ABN.
Substantially all of our assets were secured under the terms of the credit
agreement. At the time of the IPO, approximately $5.2 million was due and owing
under the credit agreement. At December 31, 1998, the $5.6 million outstanding
under the credit agreement exceeded the maximum permitted borrowings, as
defined, pursuant to the borrowing base formula, as defined, under the credit
agreement. In February 1999, the lenders notified us that we were in default
under the credit agreement. On March 31, 1999, the credit agreement was amended,
whereby the maximum permitted borrowings was reduced to the lesser of $4.5
million or the maximum permitted borrowings under a borrowing base formula, as
defined. Borrowings under the amended credit agreement bore interest at the
lender's alternate base rate, as defined, plus 0.5%. On July 20, 1999, the
amended credit agreement was further amended, whereby (1) all existing events of
default were waived, (2) the latest maturity date of all loans outstanding was
changed to January 20, 2000 and (3) the maximum permitted borrowings was reduced
to $4.0 million, which was to decline monthly until December 31, 1999 when the
maximum permitted borrowings was to be $2.6 million. The second amended credit
agreement provided for borrowings under a revolving credit line bearing interest
at the lender's alternate base rate, as defined, plus 2% (8.0% at December 31,
1998), subject to a borrowing base formula, as defined. As consideration for the
second amended credit agreement, we paid a fee of $40,000 and issued warrants to
purchase up to 781,645 shares of our common stock, subject to anti-dilution
rights, at $4.50 per share. Such warrants were terminated on September 29, 1999
pursuant to the second amended credit agreement when amounts outstanding under
the second amended credit agreement were repaid, as described below.
On September 29, 1999, amounts then outstanding under the second amended
credit agreement were repaid when we entered into a loan and security agreement
with Foothill Capital Corporation, a subsidiary of Wells Fargo Bank, maturing on
September 29, 2004. The loan and security agreement, which is secured by
substantially all of our assets, provides for borrowings in an aggregate amount
up to $10.0 million (which may be increased to $15.0 million with the consent of
the parties), subject to a borrowing base formula, under a revolving credit
facility, term loan and capital expenditure loan. Borrowings under the loan and
security agreement bear interest at the lender's reference rate, as defined,
plus 1.5%, which may decrease to 1.25%, 1.00%, or 0.5% under certain
circumstances. Under the terms of the loan and security agreement, the maximum
amounts of the term and capital expenditure loans are approximately $1.0 million
and $2.0 million, respectively, and are repayable in sixty equal monthly
installments.
The loan and security agreement contains covenants customary for credit
facilities of a similar nature, including limitations on our ability to, among
other things, (1) declare dividends or repurchase or redeem stock, (2) prepay,
redeem or repurchase debt, incur liens and engage in sale-leaseback
transactions, (3) make loans and investments, (4) incur additional debt, (5)
amend or otherwise alter material agreements or enter into restrictive
agreements, (6) make capital expenditures in any fiscal year in excess of $2.5
million, (7) engage in mergers, acquisitions and asset sales, (8) engage in
certain transactions with affiliates and (9) materially alter the nature of our
business. Additionally, under the terms of the loan and security agreement, we
are required to achieve Year 2000 compliance by December 31, 1999. We are also
required to
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<PAGE> 24
comply with specified financial covenants and ratios and must provide to the
lender our March 31 and June 30, 1999 unaudited financial statements by December
15, 1999 and our September 30, 1999 unaudited financial statements by December
31, 1999. The loan and security agreement provides for events of default
customary for transactions of this type, including nonpayment,
misrepresentation, breach of covenant, cross-defaults, bankruptcy, adverse
judgments in excess of $0.2 million, and change of ownership and control.
As a result of the amended credit agreement, in the first quarter of 1999
we will write off unamortized deferred financing costs of approximately $0.4
million relating to the credit agreement. As a result of the second amended
credit agreement, in the third quarter of 1999 we will write off unamortized
deferred financing costs of approximately $59,000 relating to the amended credit
agreement. As a result of the loan and security agreement, in the third quarter
of 1999 we will write off the remaining unamortized deferred financing costs
(approximately $31,000) relating to the second amended credit agreement.
During 1998 and 1997, the weighted average interest rate of outstanding
borrowings was approximately 8.4% and 9.0%, respectively. The average aggregate
borrowings during 1998 and 1997 was approximately $5.2 million and $0.9 million,
respectively.
Prior to our IPO, our cash accounts had been controlled on a centralized
basis by ABN and, accordingly, cash receipts and disbursements had been received
or made through ABN and were recorded as due from ABN and affiliates. Subsequent
to our IPO, we maintain our own centralized cash management system. Prior to our
IPO, cash had been provided to ABN in the ordinary course of business by way of
intercompany advances to service its debt obligations and for general corporate
purposes. Upon consummation of our IPO, these intercompany advances were
cancelled and included in the deemed dividend to ABN of $33.9 million.
Immediately following our IPO, we had approximately $5.2 million of secured bank
debt and nominal cash.
For the year ended December 31, 1998, our operating activities provided
cash flow of $7.4 million compared to $4.0 million and $4.6 million of cash flow
provided by operating activities in 1997 and 1996, respectively. The increase in
cash flows was primarily due to sales in the fourth quarter of 1998, at a
discount from the normal sales price in exchange for immediate payment, and
customer advances, as discussed above, as well as an increase in amounts owed to
vendors.
Investing activities for the years ended December 31, 1998, 1997 and 1996
used cash flows of approximately $0.4 million, $0.5 million, and $0.4 million,
respectively. These activities primarily reflected capital expenditures for the
respective years. We anticipate that capital expenditures in 1999 and 2000 will
be approximately $0.6 million and $0.7 million, respectively. These amounts
include approximately $0.4 million in 1999 for new systems which will be year
2000 compliant, with the balance relating to capital expenditures required to
improve production capabilities.
Financing activities for the years ended December 31, 1998, 1997 and 1996
used cash flows of $3.0 million, $3.4 million and $7.4 million, respectively.
The activity in 1998 was comprised of advances to ABN and affiliates ($7.8
million) and deferred financing costs ($0.5 million), offset by borrowings under
the revolving credit agreement and other borrowings ($5.3 million). The activity
in 1997 and 1996 was comprised principally of advances to ABN and affiliates
($4.1 million and $7.4 million, respectively) and, in 1997, was offset by $0.7
million of borrowings under the then existing revolving credit facility.
We believe that cash flows from operations, together with cash balances and
availability of funds under the loan and security agreement, will be sufficient
to meet working capital needs, service debt and fund capital expenditures for
the next twelve months.
We are a party to certain legal proceedings that may affect our financial
position. For a description of these proceedings, see "Item 3. -- Legal
Proceedings."
On August 3, 1999, the New York Stock Exchange suspended trading in our
common stock for failure to deliver its Annual Report on Form 10-K for the year
ended December 31, 1998 and its Quarterly Report on Form 10-Q for the three
months ended March 31, 1999 on a timely basis. Following the suspension, the
NYSE notified us of its intent to apply for delisting of our common stock. Our
common stock will not resume
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<PAGE> 25
trading on the NYSE, but we intend to seek to have our common stock traded on
another stock exchange or quoted on Nasdaq.
NEW ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. We adopted
SOP 98-1 on January 1, 1999. Adoption of this statement did not have a material
impact on our financial position, results of operations, or cash flows.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on
the Cost of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. We adopted SOP 98-5 on January 1, 1999. Adoption of this
statement did not have a material impact on our financial position, results of
operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which, as amended,
is effective for fiscal years beginning after June 15, 2000. SFAS No. 133
requires the recognition of all derivatives in the balance sheets as either
assets or liabilities measured at fair value. We will adopt SFAS No. 133 for the
2001 fiscal year. We are currently evaluating the impact SFAS No. 133 will have
on our financial position, results of operations and cash flows.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs using only the last
two digits to refer to a year. Therefore, these computer programs do not
properly recognize a year that begins with "20" instead of the familiar "19." If
not corrected, these computer applications could fail or create erroneous
results. The global extent of the potential impact of the Year 2000 problem is
not yet known, and if not timely corrected, it could adversely affect the
economy and us. We use computer information systems and manufacturing equipment,
which may be affected. We also rely on suppliers and customers who are also
dependent on systems and equipment, which use date sensitive software. We
recognize the importance of the Year 2000 issue and it has been given high
priority.
Late in 1997 we began to review the production equipment used in the
manufacture of our products as well as the systems related to the infrastructure
of our manufacturing and office facilities. We inventoried and verified Year
2000 readiness of computer controlled manufacturing equipment and computer
controls for our manufacturing and office facilities. This equipment included
the air conditioning and heating systems, the elevator and all manufacturing
equipment. This process was validated by equipment manufacturers and was
completed in December 1998.
In December 1998, we began evaluating and testing our internal computer
information systems. This effort involved plans for creating or purchasing
replacement systems for those computer information systems which were developed
internally as well as obtaining versions of software purchased from third
parties which are Year 2000 compliant. We expect to have converted or replaced
computer information systems for our entire business operations by the end of
the fourth quarter of 1999 with an estimated total cost of approximately
$425,000, which does not include internal costs associated with our Year 2000
remediation. Our internal costs associated with our Year 2000 remediation are
being expensed as incurred, and have not been material to our past performance
and are not expected to be material relative to our future performance. No funds
were expended relating to our Year 2000 remediation during 1998. Through October
31, 1999, approximately $380,000 was expended and approximately $45,000 will be
expended in November and December 1999. Our current estimates of the amount of
costs and time necessary to remediate and test our computer systems are based on
the facts and circumstances existing and known at this time. These estimates
were made using assumptions of future events including the continued
availability of certain resources, implementation success by key third parties
and other factors.
We are in the process of implementing new financial and manufacturing
software to comply with the Year 2000 issues and to improve our management
reporting capabilities. All mission critical portions of the
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<PAGE> 26
software have been pilot tested to insure the correct operation of the hardware
and software. We have begun testing in parallel the new financial and
manufacturing software, and expect that such testing will include data through
November 30, 1999 with an expected completion date of December 15, 1999. Once
such parallel testing is completed, we will consider our mission critical
hardware and software to be Year 2000 compliant. As the new financial and
manufacturing software is implemented and tested, our Year 2000 contingency plan
has also been modified to include the Year 2000 compliant capabilities of the
new portions of the software.
Also, in late 1998 we began to assess the Year 2000 remediation efforts of
our suppliers, including providers of services such as utilities, and customers
where there is a significant business relationship. These efforts however
provide no assurances that we will not be affected by the Year 2000 problems of
other organizations. This process was completed in March 1999. To date, however,
the information received from our suppliers and customers indicate that their
respective Year 2000 remediation efforts are on target to achieve Year 2000
compliance by December 31, 1999.
If we are unsuccessful or if the remediation efforts of our key suppliers
or customers are unsuccessful with regard to Year 2000 remediation, there may be
a material adverse impact on our results and financial condition. A worst case
scenario would include the loss of utility service, rendering us unable to
manufacture and distribute. Our contingency plan includes such precautionary
measures as managing inventory levels, the deployment of manual systems, the use
of alternate computer software that we currently own and the use of outside
contractors. At this time, however, we are unable to quantify any potential
adverse impact but will continue to monitor and evaluate the situation.
IMPACT OF INFLATION
In recent years, inflation has not had a significant impact on our
historical operations. There can be no assurance that inflation will not
adversely affect our operations in the future, particularly in emerging markets
where inflationary conditions tend to be more prevalent.
UNAUDITED QUARTERLY RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998(A)
--------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER
--------------------- --------------------- ---------------------
AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED FOURTH QUARTER
---------- -------- ---------- -------- ---------- -------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales(b)................................ $7,035 $10,176 $9,581 $4,636 $10,524 $5,091 $ 8,766
Cost of goods sold...................... 2,438 4,609 4,007 2,100 3,781 1,930 10,425
Net income (loss)....................... 1,793 2,510 2,279 387 2,771 294 (2,072)
Net income (loss) per share -- basic and
diluted............................... $ 0.13 $ 0.18 $ 0.17 $ 0.03 $ 0.20 $ 0.02 $ (0.15)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997(A)
---------------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
--------------------- --------------------- --------------------- ---------------------
AS AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales......................... $5,241 $6,198 $6,296 $5,969 $8,104 $7,786 $11,274 $ 3,132
Cost of goods sold............ 2,629 3,556 2,591 3,189 2,617 2,348 4,075 3,060
Net income (loss)............. 657 633 1,422 909 2,275 2,245 3,185 (967)
Net income (loss) per share --
basic and diluted........... $ 0.05 $ 0.05 $ 0.10 $ 0.07 $ 0.17 $ 0.16 $ 0.23 $ (0.07)
</TABLE>
- ---------------
(a) The financial statements each of the quarters in the period ended September
30, 1998 and the year ended December 31, 1997 have been restated. See Note
11 to the financial statements.
(b) In the first quarter of 1998, ABNH recorded sales of $6.5 million related to
a customer order which was transferred to ABNH's on-site secured facility
(See Note 1 to the financial statements).
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<PAGE> 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not engage in significant activity with respect to market risk
sensitive instruments. Accordingly, our risk with respect to market risk
sensitive instruments is immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Supplementary Data required by this item are
filed as part of this Form 10-K. See Index to Financial Statements on page F-1
of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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<PAGE> 28
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF REGISTRANT
The following table sets forth certain information concerning our
directors, executive officers and key employees. All directors hold office until
the next annual meeting of stockholders or until their successors have been
elected and qualified. Officers are appointed by the board of directors and
serve at the discretion of the board.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Salvatore F. D'Amato............................ 71 Chairman of the Board
Kenneth H. Traub................................ 38 President, Chief Operating Officer and Director
Stephen A. Benton*.............................. 58 Director
C. Gerald Goldsmith*............................ 71 Director
Russell LaCoste................................. 49 Executive Vice President, Corporate Development
and Marketing
Alan Goldstein.................................. 52 Vice President and Chief Financial Officer
KEY EMPLOYEES:
Michael T. Banahan.............................. 41 Vice President, Sales and Marketing
George Condos................................... 37 Controller
</TABLE>
- ---------------
* Member of the audit committee.
Salvatore F. D'Amato has served as our Chairman of the Board since April
1999 and as a director since March 1999. He was also our Chairman of the Board
and President from 1983 to 1990. Mr. D'Amato was President and a director of
ABN, our former parent corporation, from 1977 to 1983. Prior thereto he served
as Vice President, Engineering and Senior Vice President, Operations with ABN.
Mr. D'Amato holds a masters degree in Engineering from Columbia University.
Kenneth H. Traub has served as our President and Chief Operating Officer
since February 1999, as our consultant since January 1999 and as a director
since April 1999. Previously, Mr. Traub co-founded Voxware, Inc., a developer of
digital speech processing technologies, and served on its board of directors
from February 1995 to January 1998 and as its Executive Vice President, Chief
Financial Officer and Secretary from February 1995 to April 1998. Prior thereto,
Mr. Traub was Vice President of Trans-Resources, Inc., a diversified
multinational holding company. Mr. Traub holds an M.B.A. from the Harvard
Graduate School of Business Administration and a B.A. from Emory University.
Stephen A. Benton has served as a director since July 1998. Dr. Benton is
the founding head of the Spatial Imaging Group at the Massachusetts Institute of
Technology, where he has been a faculty member since 1982. He is a fellow of the
Optical Society of America and the Society for Imaging Science and Technology.
Dr. Benton holds a Ph.D. in Applied Physics from Harvard University.
C. Gerald Goldsmith has served as a director since July 1998. Mr. Goldsmith
has been an independent investor and financial advisor for over 20 years. He is
a director of ABN, Innkeepers USA Trust, Plymouth Rubber Company, Inc., Palm
Beach National Bank & Trust Company and Intracoastal Health System. Mr.
Goldsmith holds an M.B.A. from the Harvard Graduate School of Business
Administration.
Russell LaCoste has served as our Executive Vice President, Corporate
Development and Marketing since October 1999. He also served as our Vice
President, Sales and Marketing from 1984 to 1992. Mr. LaCoste was Vice President
of Sales and Marketing of Kurz Transfer Products, a manufacturer of specialty
printing products, from September 1995 to October 1999. From 1992 to September
1995, he was President of Optigraphics Corporation, a specialty printer. Mr.
LaCoste holds a B.S. in Marketing from the University of Vermont and an M.B.A.
from the University of Bridgeport.
26
<PAGE> 29
Alan Goldstein has served as our Vice President and Chief Financial Officer
since April 1999 and as our consultant since February 1999. Mr. Goldstein was
Vice President and Chief Accounting Officer of Complete Management, Inc., a
physician management company, from June 1997 to July 1998, and Vice President
and Chief Financial Officer of RF International, Inc., a multinational
transportation services holding company, from July 1994 to December 1996. During
other periods Mr. Goldstein acted as an independent consultant. Mr. Goldstein
holds a B.S. in Business Administration from Boston University and a M.S. in
Accounting from Long Island University. Mr. Goldstein is a Certified Public
Accountant.
Michael T. Banahan has served as our Vice President, Sales and Marketing
since May 1999. He also served as a senior member of our sales department from
1989 to May 1999. Mr. Banahan holds a B.A. in Marketing Management from the
University of Rhode Island.
George Condos has served as our Controller since May 1999 and as our
consultant since February 1999. Mr. Condos was Controller of PSR Logistics, a
transportation company, from January 1997 to August 1998. From February 1995 to
January 1997, he was District Controller and Office Manager at Browning-Ferris
Industries, a waste management and recycling company. From 1991 to February
1995, he was Controller of United Carting Company, a waste services company. Mr.
Condos holds a B.S. in Accounting from Fairleigh Dickinson University.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) under the Securities Exchange Act of 1934 requires our
executive officers and directors, and persons who beneficially own more than ten
percent of our common stock, to file initial reports of ownership and reports of
changes in ownership with the SEC. Executive officers, directors and greater
than ten percent beneficial owners are required by the SEC to furnish us with
copies of all Section 16 forms they file.
Based upon a review of the copies of such forms furnished to us and written
representations from our executive officers and directors, we believe that the
reporting requirements of Section 16, as amended, applicable to our executive
officers, directors and greater than ten percent beneficial owners were complied
with on a timely basis for all transactions that occurred during 1998, except
that Stephen A. Benton and C. Gerald Goldsmith, each of whom became a director
of ABNH and received a grant of options to purchase ABNH common stock in July
1998, failed to timely report such events on Form 3. These events have been
subsequently reported.
27
<PAGE> 30
ITEM 11. EXECUTIVE COMPENSATION.
The following table provides information concerning compensation paid to or
earned during 1996, 1997 and 1998 by each individual who served as our CEO
during 1998 and the next three most highly compensated executive officers during
1998 (the "Named Executive Officers"). None of our other executive officers
earned salary and bonus in excess of $100,000 during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- ----------------
SHARES OF COMMON
OTHER ANNUAL STOCK UNDERLYING
SALARY BONUS COMPENSATION(1) OPTIONS
NAME YEAR ($) ($) ($) (#)
- ---- ---- -------- ------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Morris Weissman(2)............ 1996 -- -- -- --
1997 -- -- -- --
1998 -- -- -- 400,000
Joshua C. Cantor(3)........... 1996 250,000 -- 440 --
1997 250,000 25,000 31,908 --
1998 250,000 -- 8,924 200,000
Richard P. Macchiarulo(4)..... 1996 -- -- -- --
1997 87,847 28,280 -- --
1998 99,167 -- 1,670 40,000
Jeffrey N. Dugal (5).......... 1996 -- -- -- --
1997 51,897 12,500 1,925 --
1998 120,750 5,190 3,150 40,000
</TABLE>
- ---------------
(1) Other Annual Compensation for Messrs. Cantor, Macchiarulo and Dugal consists
of the use of automobiles paid for by us.
(2) Mr. Weissman served as Chairman of the Board and Chief Executive Officer
from 1990 to April 1999.
(3) Mr. Cantor served as Executive Vice President and General Manager from
November 1995 to May 1997 and as President from May 1997 to February 1999.
(4) Mr. Macchiarulo served as Vice President -- Finance from June 1997 to
February 1999.
(5) Mr. Dugal served as Vice President -- Operations from June 1997 to February
1999.
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<PAGE> 31
The following table provides information concerning option grants during
1998 to the Named Executive Officers. No options were exercised during 1998.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
--------------------------------------------------- ---------------------
SHARES OF PERCENT OF
COMMON TOTAL
STOCK OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS(1) EMPLOYEES PRICE EXPIRATION 5% 10%
NAME (#) IN 1998 ($/SHARE) DATE ($) ($)
- ---- ---------- ---------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Morris Weissman(2)............ 400,000 40.6% 8.50 July 13, 2008 2,138,242 5,418,725
Joshua C. Cantor(3)........... 200,000 20.3% 8.50 July 13, 2008 1,069,121 2,709,362
Richard P. Macchiarulo(4)..... 40,000 4.1% 8.50 July 13, 2008 213,824 541,872
Jeffrey N. Dugal(5)........... 40,000 4.1% 8.50 July 13, 2008 213,824 541,872
</TABLE>
- ---------------
(1) All of the options terminated unexercised upon the officers' resignations in
1999.
(2) Mr. Weissman served as Chairman of the Board and Chief Executive Officer
from 1990 to April 1999.
(3) Mr. Cantor served as Executive Vice President and General Manager from
November 1995 to May 1997 and as President from May 1997 to February 1999.
(4) Mr. Macchiarulo served as Vice President -- Finance from June 1997 to
February 1999.
(5) Mr. Dugal served as Vice President -- Operations from June 1997 to February
1999.
The following table provides information concerning the number and value of
unexercised options held by each of the Named Executive Officers on December 31,
1998.
1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT
OPTIONS(#) DECEMBER 31, 1998($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Morris Weissman(2)......................... -- 400,000 -- 3,600,000
Joshua C. Cantor(3)........................ -- 200,000 -- 1,800,000
Richard P. Macchiarulo(4).................. -- 40,000 -- 360,000
Jeffrey N. Dugal(5)........................ -- 40,000 -- 360,000
</TABLE>
- ---------------
(1) Based on the difference between $17.50, which was the closing price per
share on December 31, 1998, and $8.50, the exercise price per share of the
options.
(2) Mr. Weissman served as Chairman of the Board and Chief Executive Officer
from 1990 to April 1999.
(3) Mr. Cantor served as Executive Vice President and General Manager from
November 1995 to May 1997 and as President from May 1997 to February 1999.
(4) Mr. Macchiarulo served as Vice President -- Finance from June 1997 to
February 1999.
(5) Mr. Dugal served as Vice President -- Operations from June 1997 to February
1999.
1998 STOCK INCENTIVE PLAN
Subsequent to our IPO, we adopted the 1998 Stock Incentive Plan for the
purpose of granting various stock incentives to our key employees. The board of
directors (or a committee appointed by the board of
29
<PAGE> 32
directors) has discretionary authority, subject to certain restrictions, to
administer the plan. The total number of shares reserved for issuance under the
plan is 1,363,000 shares of common stock. Options to purchase 1,249,000 shares
of common stock were outstanding under the plan as of October 31, 1999. Options
to purchase an additional 180,000 shares of common stock were outstanding
outside the plan as of October 31, 1999. The exercise price of options granted
under the plan may not be less than 100% of the fair market value of our common
stock on the date such option was granted. Generally, the unexercised portion of
any option automatically terminates upon the termination of the optionee's
employment with us, unless otherwise determined by the board of directors;
provided, however, that any extension shall not extend beyond the expiration of
the option, generally ten years. Upon a change in control, outstanding options
will generally become fully vested and may be exercised immediately.
We intend to file a registration statement on Form S-8 under the Securities
Act of 1933, as amended, to register all shares of Common Stock issuable under
the 1998 Stock Incentive Plan.
RETIREMENT PLANS
Retirement benefits were provided by ABN to eligible employees through the
defined contribution retirement plan of ABN; the aggregate contributions to such
plan which have been charged to our operations was approximately $0.2 million in
each of the years ended 1998, 1997 and 1996, respectively. We continue to be a
participating employer in this plan, although we plan to terminate our
participation in this plan and start our own defined contribution plan.
Certain of our employees participate in an affiliate of ABN's defined
benefit pension plan. Benefits under the plan were frozen in 1992 and were based
on years of service and average final compensation. The liability for benefits
under this plan, which is substantially funded, is the responsibility of an
affiliate of ABN. The total pension expense relating to our employees in the
aggregate for the past three years was less than $10,000.
DIRECTOR COMPENSATION
Each member of the board of directors who is not an officer or an owner of
more than 5% of our outstanding common stock will receive compensation of $1,500
per meeting for serving on the board of directors. We also will reimburse
directors for any expenses incurred in attending meetings of the board of
directors and the committees thereof. Upon their initial election to the board
of directors, each non-employee Board member is granted options to purchase
15,000 shares of our common stock. Such options are exercisable at the fair
market value of the common stock at the date of grant. These options become
vested and exercisable for up to 33 1/3% of the total option shares upon the
first anniversary of the grant of the options and for an additional 33 1/3% of
the total option shares upon each succeeding anniversary until the option is
fully exercisable at the end of the third year. The arrangements for directors'
compensation are presently under review.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Salvatore F. D'Amato in April
1999 for an initial term of two years. The agreement provides for a base salary
of $14,300 per month. In addition, Mr. D'Amato is eligible to receive bonuses at
the discretion of our board of directors. Also in connection with the agreement,
we granted to Mr. D'Amato options to purchase up to 175,000 shares of our common
stock at an exercise price of $2.50 per share. In the event of Mr. D'Amato's
termination for any reason other than for cause, as defined in the agreement, or
in the event of his resignation for good reason, as defined in the agreement, we
are required to continue to pay his salary then in effect, together with any
bonus that may have accrued, for the remainder of his employment term. Upon
termination of Mr. D'Amato's employment following a change of control, or Mr.
D'Amato's resignation for good reason within one year of a change of control, we
are required to pay him an amount equal to $171,600. In connection with his
employment agreement, Mr. D'Amato agreed not to compete with us during his term
of employment and for one year thereafter.
30
<PAGE> 33
We entered into an employment agreement with Kenneth Traub in February 1999
for an initial term of one year. The agreement provides for an annual base
salary of $250,000, to be increased by not less than 3% per year upon renewal.
In addition, Mr. Traub is eligible to receive bonuses at the discretion of our
board of directors, including a target bonus of $25,000 per quarter. Also in
connection with the agreement, we granted to Mr. Traub options to purchase up to
250,000 shares of our common stock at an exercise price of $1.75 per share. In
May 1999, Mr. Traub was granted additional options to purchase up to 100,000
shares of our common stock at an exercise price of $2.50 per share. In the event
of Mr. Traub's termination for any reason other than for cause, as defined in
the agreement, or in the event of his resignation for good reason, as defined in
the agreement, (1) we are required to pay him (x) his salary then in effect with
any bonus which may have been accrued or which otherwise would have been granted
by the board to him for a period of two years following such termination without
cause or (y) 50% of his salary then in effect with any bonus which may have been
accrued or which otherwise would have been granted by the board to him for a
period of two years following such resignation for good reason, (2) we are
required to continue any benefits to Mr. Traub and (3) all unvested options to
purchase common stock granted under the 1998 Stock Incentive Plan to him will
vest immediately. Upon termination of Mr. Traub's employment following a change
of control, or Mr. Traub's resignation for a good reason, as defined in the
agreement, following a change in control, we are required to pay him as
severance an amount equal to twice his salary then in effect if such termination
or resignation is within one year of such change of control and an amount equal
to three times his salary then in effect if such termination or resignation is
more than one year after such change of control. In connection with his
employment agreement, Mr. Traub agreed not to compete with us during his term of
employment and for one year thereafter.
We entered into an employment agreement with Alan Goldstein in April 1999
for an initial term of one year. The agreement provides for an annual base
salary of $160,000, to be increased by not less than 3% per year upon renewal.
In addition, Mr. Goldstein is eligible to receive bonuses at the discretion of
our board of directors, including a target bonus of $10,000 per quarter. In
connection with the agreement, we granted to Mr. Goldstein options to purchase
up to 100,000 shares of our common stock at an exercise price of $2.50 per
share. In the event of Mr. Goldstein's termination for any reason other than for
cause, as defined in the agreement, or in the event of his resignation for good
reason, as defined in the agreement, (1) we are required to pay him his salary
then in effect with any bonus which may have been accrued or which otherwise
would have been granted by the board to him for a period of six months following
such termination or resignation for good reason, (2) we are required to continue
any benefits to Mr. Goldstein and (3) all unvested options to purchase common
stock granted under the 1998 Stock Incentive Plan to him will vest immediately.
Upon termination of Mr. Goldstein's employment following a change of control, or
Mr. Goldstein's resignation for a good reason, as defined in the agreement,
following a change in control, we are required to pay him as severance an amount
equal to nine months of his salary then in effect. In connection with his
employment agreement, Mr. Goldstein agreed not to compete with us during his
term of employment and for one year thereafter.
We entered into an employment agreement with Russell LaCoste in September
1999. The agreement provides for a base salary of $225,000 per year. In
addition, Mr. LaCoste is eligible to receive bonuses at the discretion of our
board of directors, including a target bonus of $10,000 per quarter. Also in
connection with the agreement, we granted to Mr. LaCoste options to purchase up
to 150,000 shares of our common stock at an exercise price of $2.50 per share.
In the event of Mr. LaCoste's termination for any reason other than for cause,
we are required to continue to pay him his salary then in effect for a period of
three months following such termination. Upon termination of Mr. LaCoste's
employment within three months before or after a change of control, we are
required to pay him an amount equal to $250,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Matters concerning executive officer compensation are addressed by our
entire board of directors because we do not have a compensation committee. No
interlocking relationship exists between our board of directors and the board of
directors or compensation committee of any other company.
31
<PAGE> 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of December 15, 1999 certain information
regarding beneficial ownership of our common stock by (1) each person who is
known to us to be the beneficial owner of more than 5% of the outstanding shares
of our common stock, (2) each director, (3) each of the Named Executive Officers
and (4) all directors and executive officers as a group. All persons listed have
sole voting and investment power with respect to their shares unless otherwise
indicated. The address of all persons listed is c/o American Bank Note
Holographics, Inc., 399 Executive Boulevard, Elmsford, NY 10523 unless otherwise
indicated.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER(1) PERCENTAGE
- ---------------- --------- ----------
<S> <C> <C>
Putnam Investments, Inc.(2)................................. 1,920,102 14.1%
One Post Office Square
Boston, MA 02109
Libra Advisors, LLC(3)...................................... 711,100 5.2%
277 Park Avenue, 26th Floor
New York, NY 10172
Salvatore F. D'Amato........................................ 2,000 *
Kenneth H. Traub(4)......................................... 83,333 *
Stephen A. Benton(5)........................................ 5,000 *
C. Gerald Goldsmith(6)...................................... 6,000 *
Morris Weissman(7).......................................... 20,000 *
c/o American Banknote Corporation
410 Park Avenue
New York, NY 10022
Joshua C. Cantor(8)......................................... -- *
14 Settlers Lane
Westfield, NJ 07090
Richard P. Macchiarulo(9)................................... -- *
3165 32nd Street
Astoria, NY 11106
Jeffrey N. Dugal(10)........................................ -- *
All executives officers and directors as a group (6
persons)(11).............................................. 99,833 *
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the SEC,
and includes general voting power and/or investment power with respect to
securities. Shares of common stock subject to options currently exercisable
or exercisable within 60 days of December 15, 1999 are deemed outstanding
for computing the percentage beneficially owned by the person holding such
options.
(2) The information provided is based solely on a Schedule 13G filed with the
SEC on February 4, 1999. Putnam Investments, Inc., which is a wholly-owned
subsidiary of Marsh & McLennan Companies, Inc., wholly owns two registered
investment advisers: Putnam Investment Management, Inc., which is the
investment adviser to the Putnam family of mutual funds and which
beneficially owns 877,200 shares of our common stock, and The Putnam
Advisory Company, Inc., which is the investment adviser to Putnam's
institutional clients and which beneficially owns 1,042,902 shares of our
common stock. Both subsidiaries have dispository power over the shares as
investment managers, but each of the mutual fund's trustees have voting
power over the shares held by each fund, and The Putnam Advisory Company,
Inc. has shared voting power over the shares held by the institutional
clients. Putnam Investments, Inc. and Marsh & McLennan Companies, Inc. have
declared that the filing of a Schedule 13G with the SEC shall not be deemed
an admission by either or both of them that they are, for the purposes of
Section 13(d) or 13(g) under the Securities Exchange Act of 1934, as
amended, the beneficial owner of any shares of our common stock, and have
further stated that neither of them have any power to vote or dispose of,
or direct the voting or disposition of, any shares of our common stock.
(3) The information provided is based solely on a Schedule 13G filed with the
SEC on October 8, 1999. Libra Advisors, LLC is the general partner of Libra
Fund, L.P., which owns 676,100 shares of common
32
<PAGE> 35
stock, and the investment advisor of an offshore fund that owns 35,000
shares of common stock. Libra Advisors, LLC has the power to vote and to
direct the voting of and the power to dispose and direct the disposition of
these 711,100 shares. Ranjon Tandon is the sole voting member and manager
of Libra Advisors, LLC and may be deemed to have the power to vote and to
direct the voting of and the power to dispose and direct the disposition of
the 711,100 shares of common stock beneficially owned by Libra Advisors,
LLC.
(4) Consists of 83,333 shares of common stock subject to options currently
exercisable or exercisable within 60 days of December 15, 1999.
(5) Consists of 5,000 shares of common stock subject to currently exercisable
options.
(6) Includes 5,000 shares of common stock subject to currently exercisable
options.
(7) Mr. Weissman served as Chairman of the Board and Chief Executive Officer
from 1990 to April 1999. The information regarding Mr. Weissman's
beneficial ownership of our common stock is based solely on a review of
filings made with the SEC.
(8) Mr. Cantor served as Executive Vice President and General Manager from
November 1995 to May 1997 and as President from May 1997 to February 1999.
The information regarding Mr. Cantor's beneficial ownership of our common
stock is based solely on a review of filings made with the SEC.
(9) Mr. Macchiarulo served as Vice President -- Finance from June 1997 to
February 1999. The information regarding Mr. Macchiarulo's beneficial
ownership of our common stock is based solely on a review of filings made
with the SEC.
(10) Mr. Dugal served as Vice President -- Operations from June 1997 to February
1999. The information regarding Mr. Dugal's beneficial ownership of our
common stock is based solely on a review of filings made with the SEC.
(11) Includes 93,333 shares of common stock subject to options currently
exercisable or exercisable within 60 days of December 15, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Prior to our IPO in July 1998, we were a wholly-owned subsidiary of ABN.
ABN does not own any of our common stock following the IPO. In connection with
the IPO, we entered into a number of agreements with ABN relating to the
transition period and to defining our ongoing relationships following the IPO,
as follows:
Separation Agreement. This agreement provides that:
- we will generally indemnify ABN, including its officers, directors,
employees and affiliates, against all costs, liabilities and
expenses relating to the IPO and the conduct by us of our business,
including as a result of guarantees by ABN of any of our
obligations,
- ABN will indemnify us against all costs, liabilities and expenses
relating to the conduct by ABN of its business, including as a
result of guarantees by us of any obligations of ABN,
- immediately prior to the closing of the IPO, we will have a nominal
amount of unrestricted cash and ABN shall be entitled to all
unrestricted cash on hand,
- ABN will indemnify and hold us harmless for all federal, foreign,
state and local franchise, income, sales, use, transfer and other
tax liabilities or obligations, including interest and penalties,
attributable to ABN's consolidated group activities (other than our
activities) for all periods,
- we will indemnify and hold harmless ABN for all federal, foreign,
state and local franchise, income, sales, use, transfer and other
tax liabilities or obligations, including interest and penalties,
attributable to our activities for all periods, and
- we and ABN will cross-indemnify each other for certain other
matters.
33
<PAGE> 36
License Agreement. This agreement provides us with the right to use
the "American Bank Note" name for a one-year term, automatically renewable
for consecutive one-year periods, for an annual fee of $1. Additionally, we
and ABN granted each other perpetual, paid-up royalty-free licenses for any
patents, trademarks or other proprietary technology used by the other in
its respective business. We agreed not to use the name "American Bank Note"
or any variation thereof in connection with any business, enterprise or
venture outside of the holography industry and not to sublicense the name
to third parties.
Transitional Services Agreement. ABN agreed to provide or cause to be
provided to us certain specified corporate and administrative services for
a one-year transitional period after our IPO. The agreement provides that
the services will be provided for fees, which will be no greater than ABN's
costs. No services were provided under the agreement.
Employee Benefits Allocation Agreement. This agreement governs the
allocation of responsibilities and costs regarding employee benefit plans
and related matters. The agreement provides that we shall establish new
benefit and insurance plans for our employees, and will cooperate with ABN
with respect to certain shared responsibilities during the transitional
period. ABN will be solely responsible for any contributions that may be
required following the IPO with respect to service prior thereto for our
employees who were covered under the ABN defined benefit retirement plan.
34
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
The financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
(2) Financial Statement Schedules
The financial statement schedule required by this item is
submitted in a separate section on page S-1 of this report.
Schedules other than that included at page S-1 of this report have
been omitted because of the absence of conditions under which they
are required or because the required information is included in
our financial statements or notes thereto.
(3) Exhibits
See (c) below.
(b) Reports on Form 8-K
None.
(c) Exhibits
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation.*
3.2 Amended and Restated By-Laws.*
4.1 Form of Common Stock Certificate.*
10.1 Form of Separation Agreement.*
10.2 Form of License Agreement.*
10.3 Form of Transitional Services Agreement.*
10.4 Form of Employee Benefits Allocation Agreement.*
10.5 Form of 1998 Stock Incentive Plan.*
10.6 Form of Defined Contribution Plan.*
10.7 Production Agreement between MasterCard International
Incorporated and American Bank Note Holographics, Inc.,
dated as of February 1, 1996.*
10.8 Letter Agreement, dated June 29, 1998, between MasterCard
International Incorporated and American Bank Note
Holographics, Inc., amending the Production Agreement dated
as of February 1, 1996.+
10.9 Letter Agreement, dated March 3, 1999, between MasterCard
International Incorporated and American Bank Note
Holographics, Inc., further amending the Production
Agreement dated as of February 1, 1996.
10.10 Loan and Security Agreement, dated as of September 29, 1999,
between Foothill Capital Corporation and American Bank Note
Holographics, Inc.
10.11 Employment Agreement, dated April 20, 1999, between
Salvatore F. D'Amato and American Bank Note Holographics,
Inc.
10.12 Employment Agreement, dated February 3, 1999, between
Kenneth H. Traub and American Bank Note Holographics, Inc.
10.13 Employment Agreement, dated April 30, 1999, between Alan
Goldstein and American Bank Note Holographics, Inc.
10.14 Employment Agreement, dated September 15, 1999, between
Russell LaCoste and American Bank Note Holographics, Inc.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-51845).
+ Portions have been omitted pursuant to a request for confidential treatment.
(d) Financial Statement Schedules
See (a)(2) above.
35
<PAGE> 38
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-1
FINANCIAL STATEMENTS:
Balance Sheets, December 31, 1998 and 1997 (Restated)..... F-2
Statements of Income for the Years Ended December 31,
1998, 1997 (Restated) and 1996 (Restated).............. F-3
Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 (Restated) and 1996
(Restated)............................................. F-4
Statements of Cash Flows for the Years Ended December 31,
1998, 1997 (Restated) and 1996 (Restated).............. F-5
Notes to Financial Statements............................. F-6
Schedule II- Valuation and Qualifying Accounts............ S-1
</TABLE>
36
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
American Bank Note Holographics, Inc.
Elmsford, New York
We have audited the accompanying balance sheets of American Bank Note
Holographics, Inc. as of December 31, 1998 and 1997, and the related statements
of income, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedule listed in the accompanying Table of Contents. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of American Bank Note Holographics, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 10 to the financial statements, the Company is
involved in certain litigation and potential litigation.
As discussed in Note 11 to the financial statements, the accompanying 1997
and 1996 financial statements have been restated.
Deloitte & Touche LLP
New York, New York
November 11, 1999 (except as to paragraph 7 of Note 10,
the date of which is November 16, 1999, and
paragraph 6 of Note 10, the date of which is December 1, 1999)
F-1
<PAGE> 40
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
------- --------------
(AS RESTATED-
SEE NOTE 11)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 4,319 $ 253
Accounts receivable, net of allowance for doubtful
accounts of
$131 and $168........................................ 4,023 5,897
Inventories, net of allowances of $2,756 and $467...... 5,827 6,031
Deferred income taxes.................................. 1,777 708
Prepaid expenses and other............................. 427 95
------- -------
Total current assets.............................. 16,373 12,984
MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- Net...... 5,325 5,695
OTHER ASSETS................................................ 680 43
EXCESS OF COST OVER NET ASSETS ACQUIRED -- Net of
accumulated amortization of $1,919 and $1,568............. 8,442 8,793
------- -------
TOTAL ASSETS................................................ $30,820 $27,515
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit....................................... $ 5,591 $ 674
Current portion of notes payable....................... 304 --
Accounts payable....................................... 4,376 2,244
Accrued expenses....................................... 2,619 1,382
Customer advances...................................... 1,460 --
------- -------
Total current liabilities......................... 14,350 4,300
OTHER LONG-TERM LIABILITIES, INCLUDING NOTES PAYABLE........ 477 460
DEFERRED INCOME TAXES....................................... 1,463 1,590
------- -------
Total liabilities................................. 16,290 6,350
------- -------
COMMITMENTS AND CONTINGENCIES -- Note 10
STOCKHOLDERS' EQUITY:
Preferred Stock, authorized 5,000,000 shares; no shares
issued or outstanding
Common Stock, par value $.01 per share, authorized,
30,000,000 shares; issued and outstanding, 13,636,000
shares................................................ 136 136
Additional paid-in capital............................. 11,627 11,627
Retained earnings...................................... 2,767 35,536
Due from Former Parent and affiliates.................. -- (26,134)
------- -------
Total stockholders' equity........................ 14,530 21,165
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $30,820 $27,515
======= =======
</TABLE>
See notes to financial statements.
F-2
<PAGE> 41
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(AS RESTATED-
SEE NOTE 11)
<S> <C> <C> <C>
SALES....................................................... $28,669 $23,085 $27,516
------- ------- -------
COSTS AND EXPENSES:
Cost of goods sold..................................... 19,064 12,153 14,710
Selling and administrative............................. 6,291 5,813 4,711
Depreciation and amortization.......................... 1,080 1,136 1,141
------- ------- -------
26,435 19,102 20,562
------- ------- -------
Operating income.................................. 2,234 3,983 6,954
------- ------- -------
OTHER -- Net:
Royalty income......................................... 554 785 128
Intercompany interest income........................... 183 305 305
Other income........................................... -- 36 68
Interest expense....................................... (583) (159) --
------- ------- -------
154 967 501
------- ------- -------
INCOME BEFORE TAXES ON INCOME............................... 2,388 4,950 7,455
TAXES ON INCOME............................................. 1,269 2,130 3,117
------- ------- -------
NET INCOME.................................................. $ 1,119 $ 2,820 $ 4,338
======= ======= =======
NET INCOME PER SHARE:
Basic and diluted...................................... $ 0.08 $ 0.21 $ 0.32
======= ======= =======
</TABLE>
See notes to financial statements.
F-3
<PAGE> 42
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
DUE FROM
COMMON STOCK ADDITIONAL FORMER
---------------- PAID-IN RETAINED PARENT AND
SHARES AMOUNT CAPITAL EARNINGS AFFILIATES TOTAL
------- ------ ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 (as
restated -- see Note 11).............. 13,636 $136 $11,627 $28,378 $(14,689) $25,452
Change during year............... -- -- -- -- (7,356) (7,356)
Net income....................... -- -- -- 4,338 -- 4,338
------- ---- ------- ------- -------- -------
BALANCE, DECEMBER 31, 1996 (as
restated -- see Note 11)............ 13,636 136 11,627 32,716 (22,045) 22,434
Change during year............... -- -- -- -- (4,089) (4,089)
Net income....................... -- -- -- 2,820 -- 2,820
------- ---- ------- ------- -------- -------
BALANCE, DECEMBER 31, 1997 (as
restated -- see Note 11)............ 13,636 136 11,627 35,536 (26,134) 21,165
Change during year............... -- -- -- -- (7,754) (7,754)
Deemed dividend to Former Parent
and affiliates (see Note 1).... -- -- -- (33,888) 33,888 --
Net income....................... -- -- -- 1,119 -- 1,119
------- ---- ------- ------- -------- -------
BALANCE, DECEMBER 31, 1998............ 13,636 $136 $11,627 $ 2,767 $ -- $14,530
======= ==== ======= ======= ======== =======
</TABLE>
See notes to financial statements.
F-4
<PAGE> 43
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(AS RESTATED-
SEE NOTE 11)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 1,119 $ 2,820 $ 4,338
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 1,080 1,136 1,141
Deferred income taxes................................ (1,196) (279) 508
Changes in operating assets and liabilities:
Accounts receivable.................................. 1,874 696 (2,198)
Inventories.......................................... 204 (1,081) (144)
Prepaid expenses and other........................... (459) 127 19
Accounts payable, accrued expenses and other......... 3,313 574 976
Customer advances.................................... 1,460 -- --
------- ------- -------
Net cash provided by operating activities......... 7,395 3,993 4,640
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (359) (461) (390)
------- ------- -------
Net cash used in investing activities............. (359) (461) (390)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances to Former Parent and affiliates, net.......... (7,754) (4,089) (7,356)
Deferred financing costs............................... (510) -- --
Notes payable, net..................................... 377 -- --
Revolving credit borrowings, net....................... 4,917 674 --
------- ------- -------
Net cash used in financing activities............. (2,970) (3,415) (7,356)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 4,066 117 (3,106)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 253 136 3,242
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 4,319 $ 253 $ 136
======= ======= =======
SUPPLEMENTAL CASH PAYMENTS:
Taxes (including amounts paid to Former Parent)........ $ 2,799 $ 5,485 $ 3,179
======= ======= =======
Interest............................................... $ -- $ 159 $ --
======= ======= =======
</TABLE>
See notes to financial statements.
F-5
<PAGE> 44
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Bank Note Holographics, Inc. (the "Company") was, until July 20,
1998 (the "Offering Date"), a wholly-owned subsidiary of American Banknote
Corporation (the "Former Parent"). On the Offering Date, the Former Parent
completed the sale of 13,636,000 shares of the Company's common stock in a
public offering (the "Offering"), representing its entire investment in the
Company. The Company did not receive any proceeds from the Offering.
Additionally, in connection with the Offering, the amounts due from the Former
Parent and affiliates of approximately $33.9 million were cancelled and deemed
to be a dividend (see Note 7). Immediately following the Offering, the Company
had approximately $5.2 million of secured bank debt and nominal cash. For
financial reporting purposes, the amounts due from the Former Parent and
affiliates prior to the Offering Date have been classified within stockholders'
equity.
On June 11, 1998, the Company declared a 1,363.6 to one stock split,
effective July 2, 1998, in the form of a stock dividend, of its Common Stock and
increased its authorized Common Stock to 30,000,000 shares and its authorized
Preferred Stock to 5,000,000 shares. The accompanying financial statements give
retroactive effect to the consummation of the stock split.
As a wholly-owned subsidiary, the Company was provided certain corporate
and administrative services by its Former Parent, including financial reporting,
treasury functions, tax planning and compliance, risk management, human
resources and legal services. Additionally, because the Former Parent managed
cash and financing requirements centrally, interest expense and financing
requirements prior to the Offering Date were based on the existing capital
structure. The financial position and operations of the Company may differ from
the results that may have been achieved had the Company operated as an
independent entity.
The Company originates, mass-produces, and markets secure holograms.
Holograms are used for security, packaging and promotional applications. The
Company operates in one reportable industry segment.
USE OF ESTIMATES -- The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of sales and expenses during
the reporting period. Actual results may differ materially from those estimates.
CASH AND CASH EQUIVALENTS -- All highly liquid investments with a maturity
of three months or less, when purchased, are considered to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK -- A significant portion of the Company's
accounts receivable are due from credit card issuers and related credit card
manufacturers located throughout the United States and Europe. The Company
establishes its credit polices based on an ongoing evaluation of its customers'
creditworthiness and competitive market conditions and does not require
collateral. The Company establishes its allowance for doubtful accounts based on
an assessment of exposures to credit losses at each balance sheet date and
believes its allowance for doubtful accounts is sufficient, based on the credit
exposures outstanding at December 31, 1998.
INVENTORIES AND SALES RECOGNITION -- Inventories are stated at the lower of
cost or market with cost being determined on the first-in, first-out (FIFO)
method. Hologram originations (which represent costs of a unique master
hologram, that is made to customer specifications and is an integral part of the
production process) are capitalized and charged to cost of goods sold over the
estimated production period.
Sales and the related cost of goods sold are generally recognized at the
latter of the time of shipment or when title passes to customers. In some
situations, the Company has shipped product with the right of return where the
Company is unable to reasonably estimate the level of returns and/or the sale is
contingent upon the customers' use of the product. In these situations, the
Company does not recognize sales upon product
F-6
<PAGE> 45
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
shipment, but rather when the buyer of the product informs the Company that the
product has been used. Additionally, pursuant to terms with a certain customer,
completed items are stored on behalf of the customer at the Company's on-site
secured facility and, in that instance, sales are recognized when all of the
following have occurred: the customer has ordered the goods, the manufacturing
process is complete, the goods have been transferred to the on-site secured
facility and are ready for shipment, the risk of ownership has passed to the
customer and the customer has been billed for the order. At December 31, 1997,
accounts receivable from this customer totaled $1.6 million. There were no
amounts receivable from this customer at December 31, 1998. In the first quarter
of 1998, the Company recorded sales of approximately $6.5 million under this
arrangement.
At December 31, 1998, customer advances approximating $1.5 million
represent payments received from customers for products which have not yet been
shipped ($1.2 million) and for products shipped with the right of return ($0.3
million) where the Company is unable to reasonably estimate the level of
returns. These customer advances are classified as current liabilities on the
accompanying balance sheets.
ROYALTY INCOME -- The Company enters into licensing agreements with certain
manufacturers under which the Company receives royalty payments. Royalty
payments due under licensing agreements are recognized as income either based
upon shipment reports from licensees, where available, or estimated shipments by
such licensees.
DEPRECIATION AND AMORTIZATION -- Machinery and equipment is recorded at
cost and depreciated by the straight-line method over the estimated useful lives
of 5 to 22 years.
Amortization of leasehold improvements is computed by the straight-line
method based upon the remaining term of the applicable lease, or the estimated
useful life of the asset, whichever is shorter.
LONG-LIVED ASSETS -- The Company reviews its long-lived assets for
impairment when changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Such changes in circumstances may include, among
other factors, a significant change in technology that may render an asset or an
asset group obsolete or noncompetitive, a significant change in the extent or
manner in which an asset is used, evidence of a physical defect in an asset or
asset group or an operating loss. If changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, the Company estimates the
future cash flows (undiscounted and without interest charges) expected to result
from the use of the asset and its eventual disposition, and records an
impairment loss (equal to the amount by which the carrying amount of the asset
exceeds the fair value of the asset) if such estimated cash flows are less than
the carrying amount of the asset.
Assets to be disposed of and assets not expected to provide any future
service potential to the Company are recorded at the lower of carrying amount or
fair value less costs to sell.
INTANGIBLE ASSETS -- The excess of cost over net assets acquired is being
amortized over 30 years by the straight-line method. The Company reviews
enterprise level goodwill for impairment when changes in circumstances, similar
to those described above for long-lived assets, indicate that the carrying value
may not be recoverable. Under these circumstances, the Company estimates future
cash flows using the recoverability method (undiscounted and including related
interest charges), as a basis for recording any impairment loss. An impairment
loss is then recorded to adjust the carrying value of goodwill to the
recoverable amount. The impairment loss taken is no greater than the amount by
which the carrying value of the net assets of the business exceeds its fair
value.
DEFERRED FINANCING COSTS -- Costs incurred in connection with obtaining
financing are deferred and amortized as a charge to interest expense over the
term of the related borrowing using the interest method.
F-7
<PAGE> 46
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
WARRANTY COSTS -- The Company provides for warranty costs in amounts it
estimates will be needed to cover future warranty obligations for products sold
during the year. Estimates of warranty costs are periodically reviewed and
adjusted, when necessary, to consider actual experience.
RESEARCH AND DEVELOPMENT -- Research and development costs are expensed as
incurred (1998 -- $0.3 million, 1997 -- $0.5 million and 1996 -- $0.6 million).
INCOME TAXES -- The Company accounts for income taxes under the liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. The provision for income taxes includes
deferred income taxes resulting from items reported in different periods for
income tax and financial statement purposes. Deferred tax assets and liabilities
represent the expected future tax consequences of the differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis.
STOCK-BASED COMPENSATION PLANS -- SFAS No. 123, Accounting for Stock-Based
Compensation, allows either adoption of a fair value method for accounting for
stock-based compensation plans or continuation of accounting for stock-based
compensation plans under Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations with
supplemental disclosures.
The Company has chosen to account for its stock options using the intrinsic
value based method prescribed in APB Opinion No. 25 and, accordingly, does not
recognize compensation expense for stock option grants made at an exercise price
equal to or in excess of the fair market value of the stock at the date of
grant. Pro forma net income and net income per share amounts as if the fair
value method had been adopted are presented in Note 8. SFAS No. 123 does not
impact the Company's results of operations, financial position or cash flows.
BASIC AND DILUTED NET INCOME PER SHARE -- Basic net income per share is
computed based on the weighted average number of outstanding shares of common
stock, after giving retroactive effect to the stock split. The basic weighted
average number of shares outstanding were 13,636,000 for each of the years ended
December 31, 1998, 1997 and 1996. Diluted net income per share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding and dilutive potential shares of common stock (all related to
outstanding stock options in 1998). For the year ended December 31, 1998, the
dilutive effect of approximately 65,000 equivalent shares related to stock
options was used in determining the diluted weighted average shares outstanding.
For the years ended December 31, 1998, 1997 and 1996, the diluted weighted
average number of shares outstanding were 13,701,000, 13,636,000 and 13,636,000,
respectively.
BUSINESS INFORMATION -- Sales to MasterCard were approximately 30%, 35% and
23% of sales for the years ended December 31, 1998, 1997 and 1996, respectively.
Approximately 75% of the 1998 MasterCard sales were recorded in the first
quarter of 1998. At December 31, 1997, accounts receivable from MasterCard
approximated $1.6 million. The Company is the exclusive supplier of holograms to
MasterCard pursuant to an agreement, as amended, that extends until February
2003. The agreement provides for automatic two-year renewal periods if not
terminated by either party. During 1999, the Company was informed by MasterCard
that it believes that the Company breached certain terms of the agreement in
1998 and 1997. The Company has been working closely with MasterCard to address
issues raised by MasterCard, and believes its relationship with MasterCard is
good. The loss of all or a substantial portion of the sales to MasterCard,
however, would have a material adverse effect on the financial position, results
of operations and cash flows of the Company.
F-8
<PAGE> 47
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Sales to manufacturers of VISA credit cards (approximately 50 customers)
were approximately 26%, 27% and 31% of sales for the years ended December 31,
1998, 1997 and 1996, respectively. The loss of a substantial portion of the
sales to these customers would have a material adverse effect on the financial
position, results of operations and cash flows of the Company. At December 31,
1998 and 1997, accounts receivable from these customers approximated $1.0
million and $2.5 million, respectively.
The Company has historically purchased certain key materials used in the
manufacture of its holograms from single suppliers, with which it does not have
supply contracts. Any problems that occur with respect to the delivery, quality
or cost of any such materials could have a material adverse effect on the
financial position, results of operations and cash flows of the Company.
EXPORT SALES -- U.S. export sales were 28%, 25% and 32% of sales for the
years ended December 31, 1998, 1997 and 1996, respectively. All export sales are
denominated in United States dollars. At December 31, 1998 and 1997, accounts
receivable from these customers approximated $1.2 million and $0.8 million,
respectively.
COMPREHENSIVE INCOME -- In 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income, which establishes rules for the reporting of
comprehensive income and its components. For each of the years ended December
31, 1998, 1997 and 1996, there was no difference between the Company's net
income and comprehensive income.
RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to
conform to the current year's presentation.
NEW ACCOUNTING STANDARDS -- In March 1998, the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use ("SOP 98-1"). SOP 98-1 requires computer software costs associated with
internal use software to be expensed as incurred until certain capitalization
criteria are met. The Company adopted SOP 98-1 on January 1, 1999. Adoption of
this statement did not have a material impact on the Company's financial
position, results of operations, or cash flows.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on
the Cost of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company adopted SOP 98-5 on January 1, 1999. Adoption
of this statement did not have a material impact on the Company's financial
position, results of operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which, as amended,
is effective for fiscal years beginning after June 15, 2000. SFAS No. 133
requires the recognition of all derivatives in the balance sheets as either
assets or liabilities measured at fair value. The Company will adopt SFAS No.
133 for the 2001 fiscal year. The Company is currently evaluating the impact
SFAS No. 133 will have on its financial position, results of operations and cash
flows.
F-9
<PAGE> 48
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
2. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $ 3,430 $ 54
Finished goods on consignment with customers................ 487 290
Work in process............................................. 3,273 2,413
Origination and cylinder costs*............................. 427 2,581
Raw materials............................................... 966 1,160
------- ------
8,583 6,498
Less: Reserve for obsolescence.............................. (2,756) (467)
------- ------
$ 5,827 $6,031
======= ======
</TABLE>
- ---------------
* Includes approximately $0.8 million of costs at December 31, 1997 relating to
work for customers in anticipation of orders in the ordinary course of
business. There were no such costs as of December 31, 1998.
3. MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $11,041 $10,682
Leasehold improvements...................................... 888 888
------- -------
11,929 11,570
Accumulated depreciation and amortization................... 6,604 5,875
------- -------
$ 5,325 $ 5,695
======= =======
</TABLE>
4. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accrued contract liability.................................. $ 472 $ 472
Accrued interest expense.................................... 94 175
Warranty reserve............................................ 445 59
Federal, state and local income taxes....................... 144 190
Salaries and wages.......................................... 387 353
Other....................................................... 1,077 133
------ ------
$2,619 $1,382
====== ======
</TABLE>
5. TAXES ON INCOME
In accordance with a tax allocation agreement in effect through the
Offering Date, the Company was included in the consolidated U.S. Federal income
tax return and, in certain instances, consolidated or combined state and local
income tax returns of its Former Parent and made payments to the Former Parent
based on the amounts which would be payable as Federal, state and local income
taxes as if consolidated or
F-10
<PAGE> 49
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
5. TAXES ON INCOME -- (CONTINUED)
combined returns were not filed. The Company computed its Federal, state and
local income tax provision as if it was filing separate income tax returns,
without regard to the tax allocation agreement. In October 1999, an affiliate of
the Former Parent received an assessment for approximately $0.9 million of taxes
and interest from the City of New York relating to the years ended December 31,
1990, 1991, and 1992. The Company was included in the combined City of New York
income tax returns of the Former Parent for the periods covered by the
assessment and had previously made payments to the Former Parent based on
amounts which would have been payable if the combined income tax returns were
not filed. The Company is contingently liable, jointly and severally, for U.S.
Federal, state and local income taxes for periods in which it is included in the
consolidated or combined income tax returns of its Former Parent (see Note 10).
Amounts paid to the Former Parent in excess of amounts which would have been
payable had the Company filed separate income tax returns have been charged to
Due from Former Parent and affiliates. For periods subsequent to the Offering
Date, the Company will file its own U.S. Federal and state income tax returns.
Deferred income taxes arise from temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements.
Taxes on income (benefit) are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1998 1997 1996
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................... $ 2,025 $1,912 $2,097
State and local....................................... 440 497 512
------- ------ ------
2,465 2,409 2,609
------- ------ ------
Deferred:
Federal............................................... (1,020) (240) 438
State and local....................................... (176) (39) 70
------- ------ ------
(1,196) (279) 508
------- ------ ------
$ 1,269 $2,130 $3,117
======= ====== ======
</TABLE>
A reconciliation of the taxes on income and the amount computed by applying
the Federal income tax statutory rate of 35% in 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory tax............................................... $ 836 $1,733 $2,609
Amortization of nondeductible goodwill...................... 122 122 122
State and local taxes, net of Federal benefit............... 172 298 378
Nondeductible fee........................................... 84 -- --
Other....................................................... 55 (23) 8
------ ------ ------
$1,269 $2,130 $3,117
====== ====== ======
</TABLE>
F-11
<PAGE> 50
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
5. TAXES ON INCOME -- (CONTINUED)
The tax effects of the items comprising the Company's deferred income tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets:
Uniform capitalization of inventory.................... $ 168 $ 236
Bad debt reserve....................................... 54 65
Warranty reserve....................................... 182 25
Inventory obsolescence................................. 1,131 188
Accrued vacation....................................... 42 --
Other liabilities...................................... 200 194
------ ------
Net deferred tax asset................................. $1,777 $ 708
====== ======
Deferred tax liabilities:
Excess tax over book depreciation...................... $1,637 $1,774
Postretirement medical accrual......................... (174) (162)
Supplemental retirement accrual........................ -- (22)
------ ------
Net deferred tax liability............................. $1,463 $1,590
====== ======
</TABLE>
6. REVOLVING CREDIT AGREEMENT
On July 20, 1998, contemporaneously with the Offering, the Company entered
into a $30.0 million credit facility agreement (the "Credit Agreement"),
consisting of a $20.0 million acquisition facility and a $10.0 million working
capital facility, maturing on July 20, 2004, which replaced a facility the
Company had entered into with an affiliate of its Former Parent. Substantially
all of the Company's assets were secured under the terms of the Credit
Agreement. At the time of the Offering, approximately $5.2 million was due and
owing under the Credit Agreement. At December 31, 1998, the $5.6 million
outstanding under the Credit Agreement exceeded the maximum permitted
borrowings, as defined, pursuant to the borrowing base formula, as defined,
under the Credit Agreement. In February 1999, the lenders notified the Company
that the Company was in default under the Credit Agreement. On March 31, 1999,
the Credit Agreement was amended (the "Amended Credit Agreement"), whereby the
maximum permitted borrowings was reduced to the lesser of $4.5 million or the
maximum permitted borrowings under a borrowing base formula, as defined.
Borrowings under the Amended Credit Agreement bore interest at the lender's
alternate base rate, as defined, plus 0.5%. On July 20, 1999, the Amended Credit
Agreement was amended (the "Second Amended Credit Agreement"), whereby (i) all
existing events of default were waived, (ii) the latest maturity date of all
loans outstanding was changed to January 20, 2000, and (iii) the maximum
permitted borrowings was reduced to $4.0 million, which was to decline monthly
until December 31, 1999 when the maximum permitted borrowings was to be $2.6
million. The Second Amended Credit Agreement provided for borrowings under a
revolving credit line bearing interest at the lender's alternate base rate, as
defined, plus 2% (8.0% at December 31, 1998), subject to a borrowing base
formula, as defined. As consideration for the Second Amended Credit Agreement,
the Company paid a fee of $40,000 and issued warrants to purchase up to 781,645
shares of its Common Stock, subject to antidilution rights, at $4.50 per share.
Such warrants were terminated on September 29, 1999 pursuant to the Second
Amended Credit Agreement when amounts outstanding under the Second Amended
Credit Agreement were repaid, as described below.
F-12
<PAGE> 51
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
6. REVOLVING CREDIT AGREEMENT -- (CONTINUED)
On September 29, 1999, amounts then outstanding under the Second Amended
Credit Agreement were repaid when the Company entered into a Loan and Security
Agreement with Foothill Capital Corporation, a subsidiary of Wells Fargo Bank
(the "Loan and Security Agreement"), maturing on September 29, 2004. The Loan
and Security Agreement, which is secured by substantially all of the Company's
assets, provides for borrowings in an aggregate amount up to $10.0 million
(which may be increased to $15.0 million with the consent of the parties),
subject to a borrowing base formula, under a revolving credit facility, term
loan and capital expenditure loan. Borrowings under the Loan and Security
Agreement bear interest at the lender's reference rate, as defined, plus 1.5%,
which may decrease to 1.25%, 1.00%, or 0.5% under certain circumstances. Under
the terms of the Loan and Security Agreement, the maximum amounts of the term
and capital expenditure loans are approximately $1.0 million and $2.0 million,
respectively, and are repayable in sixty equal monthly installments.
The Loan and Security Agreement contains covenants customary for credit
facilities of a similar nature, including limitations on the ability of the
Company to, among other things, (i) declare dividends or repurchase or redeem
stock, (ii) prepay, redeem or repurchase debt, incur liens and engage in
sale-leaseback transactions, (iii) make loans and investments, (iv) incur
additional debt, (v) amend or otherwise alter material agreements or enter into
restrictive agreements, (vi) make capital expenditures in any fiscal year in
excess of $2.5 million, (vii) engage in mergers, acquisitions and asset sales,
(viii) engage in certain transactions with affiliates and (ix) materially alter
the nature of its business. Additionally, under the terms of the Loan and
Security Agreement, the Company is required to achieve Year 2000 compliance by
December 31, 1999. The Company is also required to comply with specified
financial covenants and ratios and must provide to the lender its March 31 and
June 30, 1999 unaudited financial statements by December 15, 1999 and its
September 30, 1999 unaudited financial statements by December 31, 1999. The Loan
and Security Agreement provides for events of default customary for transactions
of this type, including nonpayment, misrepresentation, breach of covenant,
cross-defaults, bankruptcy, adverse judgments in excess of $0.2 million, and
change of ownership and control.
As a result of the Amended Credit Agreement, in the first quarter of 1999
the Company will write off unamortized deferred financing costs of approximately
$0.4 million relating to the Credit Agreement. As a result of the Second Amended
Credit Agreement, in the third quarter of 1999 the Company will write off
unamortized deferred financing costs of approximately $59,000 relating to the
Amended Credit Agreement. As a result of the Loan and Security Agreement, in the
third quarter of 1999 the Company will write off the remaining unamortized
deferred financing costs (approximately $31,000) relating to the Second Amended
Credit Agreement.
During 1998 and 1997, the weighted average interest rate of outstanding
borrowings was approximately 8.4% and 9.0%, respectively. The average aggregate
borrowings during 1998 and 1997 was approximately $5.2 million and $0.9 million,
respectively.
At December 31, 1998, the Company has notes payable totaling approximately
$377,000, of which $304,000 is due in 1999, $18,000 in 2000, $19,000 in 2001,
$21,000 in 2002, and $15,000 in 2003. The notes bear interest at rates ranging
from 5.85% to 8.36%.
7. RELATED PARTY TRANSACTIONS
The financial statements reflect both allocated and, where readily
determinable, actual expenses for services provided by the Company's Former
Parent and affiliates. Where allocations have been utilized, the Company, its
Former Parent and affiliates recorded transactions based upon systematic and
reasonable methods, including but not limited to sales, asset values and
headcount, all as a percent of total.
F-13
<PAGE> 52
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS -- (CONTINUED)
The amounts by major category of historical transactions with the Former
Parent and affiliates follow:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Due from (to) Former Parent and affiliates:
Balance at beginning of year.......................... $ 26,134 $22,045 $14,689
Income tax liability payable to Former Parent...... (2,272) (2,307) (2,778)
Taxes paid to Former Parent........................ 2,422 5,306 3,091
Cash advances to Former Parent..................... 7,685 2,851 8,606
Allocation of employee benefits(1)................. (402) (1,052) (936)
Sales to affiliates................................ -- 123 30
Allocation of security services.................... (100) (198) (108)
Sales and administration expenses(2)............... (244) (592) (301)
Allocation of general liability insurance.......... -- (293) (508)
Intercompany interest(3)........................... 156 305 305
Reversal of SERP liability......................... (56) -- --
Executive benefits(4).............................. (13) (54) (45)
Other.............................................. 578 -- --
Deemed dividend to Former Parent (see Note 1)...... (33,888) -- --
-------- ------- -------
Balance at end of year................................ $ -- $26,134 $22,045
======== ======= =======
</TABLE>
- ---------------
(1) Primarily medical, life and disability insurance premiums.
(2) Includes legal fees and allocated portion of audit fees.
(3) Included in the above balances is a $5.3 million note receivable from the
Former Parent that bore interest at 5.75% per annum.
(4) Includes value of restricted stock of the Former Parent.
The amount of the deemed dividend to the Former Parent is subject to
adjustment based on the Company's taxable income through the Offering Date (see
Note 5).
For financial reporting purposes, the amounts due from the Former Parent
and affiliates for periods prior to the Offering Date have been classified
within stockholders' equity.
In addition to the above, the Company sold $0.6 million, $0.4 million and
$0.7 million of holograms in 1998, 1997 and 1996, respectively, to its Former
Parent and affiliates in the normal course of business. Purchases by the Company
from the Former Parent and affiliates in the normal course of business were $0.1
million and $0.3 million in 1997 and 1996, respectively. There were no such
purchases in 1998. At December 31, 1998 and 1997, trade accounts receivable from
the Former Parent and affiliates were $0.2 million and $0.6 million,
respectively. Additionally, the Company acted as a subcontractor to an affiliate
of the Former Parent under a government contract. Sales under this subcontract,
which are billed to the affiliate of the Former Parent approximated $0.3 million
and $82,000 in 1998 and 1997, respectively. At December 31, 1998, trade accounts
receivable from the affiliate of the Former Parent under this subcontract
approximated $0.1 million. At December 31, 1998, accounts payable and accrued
expenses include approximately $0.3 million and $0.2 million, respectively, due
the Former Parent and its affiliates.
F-14
<PAGE> 53
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS -- (CONTINUED)
In 1997 and 1996, employees of the Company received stock options under the
Former Parent's stock-based compensation plans. No such options were granted in
1998. Had compensation cost for the stock option plans been determined based on
the fair value at the grant award dates, in 1996 and 1997, consistent with the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, net income
would have been reduced by approximately $13,000 and $22,000, respectively.
In connection with the Offering, the Company and its Former Parent entered
into a number of agreements relating to the transition period and to defining
their ongoing relationships following the Offering, as follows (see Note 10):
Separation Agreement -- Provides that: (i) the Company will generally
indemnify the Former Parent, including its officers, directors, employees
and affiliates, against all costs, liabilities and expenses relating to the
Offering and the conduct by the Company of its business, including as a
result of guarantees by the Former Parent of any obligations of the
Company; (ii) the Former Parent will indemnify the Company against all
costs, liabilities and expenses relating to the conduct by the Former
Parent of its business, including as a result of guarantees by the Company
of any obligations of the Former Parent; (iii) immediately prior to the
closing of the Offering, the Company will have a nominal amount of
unrestricted cash and the Former Parent shall be entitled to all
unrestricted cash on hand; (iv) the Former Parent will indemnify and hold
harmless the Company for all federal, foreign, state and local franchise,
income, sales, use, transfer and other tax liabilities or obligations,
including interest and penalties, attributable to the Former Parent's
consolidated group activities (other than activities of the Company) for
all periods; (v) the Company will indemnify and hold harmless the Former
Parent for all federal, foreign, state and local franchise, income, sales,
use, transfer and other tax liabilities or obligations, including interest
and penalties, attributable to activities of the Company for all periods;
and (vi) the Company and the Former Parent will cross-indemnify each other
for certain other matters.
License Agreement -- Provides the Company with the right to use the
American Bank Note name for a one-year term, automatically renewable for
consecutive one-year periods, for an annual fee of $1. Additionally, the
Company and Former Parent granted each other perpetual, paid-up
royalty-free licenses for any patents, trademarks or other proprietary
technology used by the other in its respective business. The Company agreed
not to use the name American Bank Note or any variation thereof in
connection with any business, enterprise or venture outside of the
holography industry and not to sublicense the name to third parties.
Transitional Services Agreement -- The Former Parent agreed to provide
or cause to be provided to the Company certain specified corporate and
administrative services for a one-year transitional period after the
Offering. The agreement provides that the services will be provided for
fees, which will be no greater than the Former Parent's costs. No services
were provided under the agreement.
Employee Benefits Allocation Agreement -- Governs the allocation of
responsibilities and costs regarding employee benefit plans and related
matters. The agreement provides that the Company shall establish new
benefit and insurance plans for its employees, and will cooperate with the
Former Parent with respect to certain shared responsibilities during the
transitional period. The Former Parent will be solely responsible for any
contributions that may be required following the Offering with respect to
service prior thereto for employees of the Company who were covered under
the Former Parent defined benefit retirement plan.
F-15
<PAGE> 54
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
8. 1998 STOCK INCENTIVE PLAN
Subsequent to the Offering Date, the Company adopted the 1998 Stock
Incentive Plan (the "1998 Plan") for the purpose of granting various stock
incentives to key employees. The Board of Directors (or a committee appointed by
the Board of Directors) has discretionary authority, subject to certain
restrictions, to administer the 1998 Plan. The total number of shares reserved
for issuance under the 1998 Plan is 1,363,000 shares of Common Stock. The
exercise price of options granted under the 1998 Plan may not be less than 100%
of the fair market value of the Common Stock on the date such option was
granted. Options granted under the 1998 Plan generally would become vested and
exercisable for up to 33 1/3% of the total optioned shares upon each succeeding
anniversary of the date of grant. Generally, the unexercised portion of any
option automatically terminates upon the termination of the optionee's
employment with the Company, unless otherwise determined by the Board of
Directors; provided, however, that any extension shall not extend beyond the
expiration of the option, generally ten years. Upon a change in control,
outstanding options will generally become fully vested and may be exercised
immediately.
A summary of the status of the Company's outstanding stock options as of
December 31, 1998 and changes during the year then ended follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
Outstanding, beginning of year.............................. -- $ --
Granted................................................ 984,250 8.50
--------
Outstanding, end of year.................................... 984,250 8.50
========
Options exercisable, year-end............................... -- 8.50
========
Weighted average fair value of options granted during the
year...................................................... $6.19
========
</TABLE>
Included in the outstanding options are options to the Company's former
Chairman and Chief Executive Officer (400,000), former President (200,000),
former Vice President-Finance (40,000) and former Vice President of Operations
(40,000), all of which were cancelled upon their resignations in 1999.
Additionally, during 1998, the Company issued 45,000 options to members of its
Board of Directors (which are reflected in the above table) at an exercise price
of $8.50 per share, representing the fair market value of the Company's common
stock on the grant date. During 1999, the Company issued options to its newly
appointed Chairman (175,000 shares at $2.50 per share), President (250,000
shares at $1.75 per share and 100,000 shares at $2.50 per share), Executive Vice
President (150,000 shares at $2.75 per share) and Chief Financial Officer
(100,000 shares at $2.50 per share) at exercise prices equal to the fair market
value of the Company's common stock on the dates of the respective grants.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE
--------------- ----------- ------------ ---------
<S> <C> <C> <C>
$8.50............................................... 984,250 9.5 $8.50
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. Accordingly, no compensation cost has been
recognized for outstanding stock options. Had compensation cost for the
Company's outstanding stock options been determined based on the fair value at
the grant dates for
F-16
<PAGE> 55
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
8. 1998 STOCK INCENTIVE PLAN -- (CONTINUED)
those options consistent with SFAS No. 123, the Company's 1998 net income and
basic and diluted net income per share would have differed as reflected by the
pro forma amounts indicated below (in thousands, except per share amounts):
<TABLE>
<S> <C>
Net income:
As reported............................................ $1,119
======
Pro forma.............................................. $ 132
======
Basic and diluted net income per share:
As reported............................................ $ 0.08
======
Pro forma.............................................. $ 0.01
======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<S> <C>
Expected volatility......................................... 71.25%
Risk-free interest rate..................................... 5.48%
Dividend yield.............................................. --
Expected life............................................... 7.5years
</TABLE>
9. EMPLOYEE BENEFITS PLANS
Certain employees of the Company have rights to benefits under the Former
Parent's defined benefit retirement plan, but are not eligible for any
additional benefits. No contributions are currently required in order to provide
those benefits. Pursuant to the Employee Benefits Allocation Agreement (see Note
7), if contributions should be required in the future, including any
contributions to fully fund plan benefits on termination of the plan, the amount
of such contributions are required to be paid by the Former Parent (see Note
10).
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE PLANS -- Prior to the
Offering Date, the Company participated in benefit plans of affiliates of its
Former Parent, which provided certain postretirement health care and life
insurance benefits for certain eligible employees. Under the terms of these
plans, the Company's employees could become eligible for these benefits if they
reached normal retirement age, with certain service requirements during the
period in which the Company participated in those plans. The Company accrued the
estimated cost of retiree benefit payments (other than pensions) during the
years an employee provided services. The Former Parent's plans are not funded.
Under the terms of the Employee Benefits Allocation Agreement (see Note 7), the
Company is not responsible for the benefits to be provided to employees who
retired from the Company prior to the Offering Date or who had qualified for
such benefits as of the Offering Date and is currently assessing whether to
continue this plan for current employees; accordingly, disclosures regarding the
status of this obligation as it relates to the Company have not been provided.
During the years ended December 31, 1998, 1997 and 1996, costs relating to these
plans approximated $21,000, $58,000 and $56,000, respectively.
RETIREMENT PLANS -- Retirement benefits were provided by the Former Parent
to eligible employees through the defined contribution retirement plan of the
Former Parent; the aggregate contributions to such plan which have been charged
to the Company's operations was approximately $0.2 million in each of the years
ended 1998, 1997 and 1996, respectively. The Company continues to be a
participating employer in this plan, although it plans to terminate its
participation in this plan and start its own defined contribution plan.
F-17
<PAGE> 56
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
9. EMPLOYEE BENEFITS PLANS -- (CONTINUED)
Certain employees of the Company participate in an affiliate of the Former
Parent's defined benefit pension plan. Benefits under the plan were frozen in
1992 and were based on years of service and average final compensation. The
liability for benefits under this plan, which is substantially funded, is the
responsibility of an affiliate of the Former Parent. The total pension expense
relating to the Company's employees in the aggregate for the past three years
was less than $10,000.
In 1997 and 1996, the Company participated in the Former Parent's
noncontributory supplemental executive retirement plan ("SERP") for certain
senior management employees of the Former Parent and its affiliates. Benefits
under the noncontributory plan are based on years of service and average final
compensation. The plan is unfunded. Following the Offering, the Company's
participants ceased to be eligible for SERP benefits, accordingly, the Company's
obligation under this plan ($56,000) was credited to Due from Former Parent and
affiliates. The aggregate contribution to such plan which has been charged to
operations was approximately $28,000 in 1997 and 1996. No contribution to the
plan was made during the year ended December 31, 1998.
10. COMMITMENTS AND CONTINGENCIES
SEC AND U.S. ATTORNEY INVESTIGATIONS -- On February 9, 1999, the Division
of Enforcement of the SEC issued a Formal Order Directing Private Investigation,
designating officers to take testimony and requiring the production of certain
documents, in connection with matters giving rise to the need to restate the
Company's previously issued financial statements (see Note 11). The Company has
provided numerous documents to and continues to cooperate fully with the SEC
staff. Management of the Company cannot predict the duration of such
investigation or its potential outcome.
The U.S. Attorney's Office for the Southern District of New York has
commenced an investigation in connection with matters giving rise to the need to
restate the Company's previously issued financial statements, (see Note 11) as
well as a possible violation in 1998 of the Foreign Corrupt Practices Act. The
Company has not been advised that it is a target of such investigation. The
Company has provided numerous documents to and continues to cooperate fully with
the U.S. Attorney's office. Management of the Company cannot predict the
duration of such investigation or its potential outcome.
LITIGATION -- A consolidated class action complaint against the Company,
certain of its former officers and directors, its Former Parent, the four
co-lead underwriters of the Offering and its auditors, has been filed in the
United States District Court for the Southern District of New York. The
complaint alleges violations of the federal securities laws and seeks to recover
damages on behalf of all purchasers of the Company's Common Stock during the
class period (July 15, 1998 through February 1, 1999). The complaint seeks
rescission of the purchase of shares of the Company's Common Stock or
alternatively, unspecified compensatory damages, along with costs and expenses
including attorney's fees. The Company and certain other defendants have
separately moved to dismiss the complaint. The Plaintiffs' discovery requests as
well as their motion for class certification have been stayed pending resolution
of the respective motions to dismiss. The Company has commenced settlement
discussions with Plantiffs' counsel. Management of the Company does not believe
it is feasible to predict or determine the outcome or resolution of these
proceedings, or to estimate the amounts of, or potential range of loss with
respect thereto. In addition, the timing of the resolution of these proceedings
is uncertain. The range of possible resolutions could include judgements against
the Company or settlements that could require substantial payments by the
Company, including costs of defending such suits, which could have a material
adverse effect on the Company's financial position, results of operations and
cash flows.
On February 14, 1997, James Rigby, Trustee in Bankruptcy for Holosonics,
Inc., Holotron Corp., Meadow Games, Inc. and Fire Diamond, Inc. commenced an
adversary proceeding in the United States
F-18
<PAGE> 57
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Bankruptcy Court for the Western District of Washington at Seattle against
International Banknote Company, Inc., the Former Parent and the Company. The
complaint alleged that the defendants were indebted to the bankruptcy estate for
royalty payments under a 1981 license and that the Company was liable for unpaid
royalties for 1990 in the amount of $226,322, for 1991 in the amount of $853,582
and through July 1992 in the amount of $568,762, plus attorney's fees and
interest on unpaid amounts. The defendants and Trustee entered into a settlement
agreement which was approved by an order of the Bankruptcy Court on September
10, 1999, whereby the defendants agreed to pay the Trustee $150,000, of which
$120,000 has been paid with the balance payable in two equal monthly
installments of $15,000 each payable ninety and one-hundred twenty days,
respectively, following entry of the order. The full amount of this settlement
has been accrued at December 31, 1998.
In 1994, plaintiffs, K.A.H. Company, Inc. and Kenneth A. Haines, filed suit
against the Company, the Former Parent and ABNH Research Co., Inc. in the
Supreme Court of the State of New York, County of New York. A judgement was
entered on March 19, 1999 for $175,639, with attorney's fees still to be
assessed. Plaintiffs' counsel has stated that he would seek in excess of
$300,000 in attorney's fees. Such judgement was entered only against the Former
Parent, which contends that the Company should contribute to the payment of the
judgement. The defendants have appealed and the plaintiffs have filed a
cross-appeal, both of which are still pending. The plaintiffs and defendants are
currently engaged in settlement discussions.
On August 17, 1999, the Company commenced an action in the Supreme Court of
the State of New York, County of Westchester, seeking recovery of approximately
$350,000 on a claim arising from amounts owed to the Company for holographic
materials sold and delivered in July 1999. The defendant removed the action to
the United States District Court for the Southern District of New York, where it
is currently pending. On December 1, 1999, the Company received the defendant's
answers to its complaint and counterclaims alleging millions of dollars in
damages arising from the Company's alleged breach of a 1993 agreement pursuant
to which the Company sold holographic material to the defendant and alleged
failure to fulfill a May 1998 purchase order. Management of the Company does not
believe that the outcome or resolution of these proceedings will have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
In 1998, the Company fulfilled an order for holograms for approximately
$600,000. In 1999, the customer alleged that the Company breached its contract
with such customer based on problems that the ultimate user was experiencing
with the holograms, and claimed potential damages in excess of $6 million.
Management of the Company does not believe that the agreement was breached, and
is in discussions with this customer in an attempt to resolve this dispute
amicably. There can be no assurance, however, that this matter will be resolved
amicably, or that this dispute will not lead to litigation with the customer.
The Company currently and from time to time is involved in litigation (as
both plaintiff and defendant) incidental to the conduct of its business;
however, other than the shareholder litigation described above, the Company is
not a party to any lawsuit or proceeding which, in the opinion of management of
the Company, is likely to have a material impact on the Company's financial
position, results of operations or cash flows.
Amounts accrued for litigation matters represent the anticipated costs
(damages and/or settlement amounts) in connection with pending litigation and
claims. The costs are accrued when it is both probable that an asset has been
impaired or a liability has been incurred and the amount can be reasonably
estimated. The accruals are based upon the Company's assessment, after
consultation with counsel, of probable loss based on the facts and circumstances
of each case, the legal issues involved, the nature of the claim made, the
nature of the damages sought and any relevant information about the plaintiffs,
and other significant factors which vary by case. When it is not possible to
estimate a specific expected cost to be incurred, the Company evaluates the
range of probable loss and records the minimum end of the range. As of December
31, 1998, accruals for
F-19
<PAGE> 58
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
litigation matters approximated $500,000. No such accruals were recorded as of
December 31, 1997. It is anticipated that the $500,000 accrual will be paid as
follows: $135,000 in 1999 and $365,000 in 2000. The Company believes, based on
information known at December 31, 1998, that anticipated probable costs of
litigation matters as of December 31, 1998 have been adequately provided to the
extent determinable.
INDEMNIFICATIONS FROM FORMER PARENT -- As described in Notes 5, 7 and 9, in
connection with the Offering, the Company and its Former Parent entered into a
number of agreements, which, among other matters, provide for the
indemnification, under certain circumstances, of the Company by the Former
Parent. During 1999, the Former Parent has experienced significant financial
difficulty, which may result in its inability to perform under the terms of the
indemnifications provided, which could have a material adverse effect on the
Company's financial position, results of operations and cash flows.
PRODUCT LIABILITY MATTERS -- The Company provides holograms in connection
with a wide range of its customers' products, in which case it is possible that
the Company is subject to product liabilities in association with those products
or in connection with the holograms used with those products. Although the
Company maintains product liability insurance, there can be no assurance that
such insurance would be available to cover any such claim or available in
amounts sufficient to cover all potential liabilities. As a result, product
liability claims could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
LEASES -- The Company has long-term operating leases for offices,
manufacturing facilities and equipment, which expire through 2007. The Company
has renewal options on some locations, which provide for renewal rents based
upon increases tied to the consumer price index.
Net rental expense was approximately $1.2 million for each of the years
ended December 31, 1998, 1997 and 1996.
At December 31, 1998, future minimum lease payments under noncancelable
operating leases are as follows: $1.2 million in 1999; $1.1 million in 2000;
$0.9 million in 2001; $0.9 million in 2002; $0.8 million in 2003; and $2.7
million thereafter.
EMPLOYMENT AGREEMENTS -- In 1999, the Company entered into employment
agreements with certain officers which provide for among other matters minimum
compensation of approximately $474,000 in 1999, $552,000 in 2000, and $65,000 in
2001. The agreements also provide for discretionary bonuses. In connection with
these agreements, the Company granted options to acquire 775,000 shares of its
Common Stock at prices ranging from $1.75 to $2.75 per share, representing the
fair market value of the Company's Common Stock on the dates of grant.
NEW YORK STOCK EXCHANGE SUSPENSION OF TRADING -- On August 3, 1999, the New
York Stock Exchange suspended trading in the Company's Common Stock for failure
by the Company to deliver its Annual Report on Form 10-K for the year ended
December 31, 1998 and its Quarterly Report on Form 10-Q for the three months
ended March 31, 1999 on a timely basis. Following the suspension, the New York
Stock Exchange notified the Company of its intent to apply for delisting of the
Company's Common Stock. The Company does not expect to resume trading on the New
York Stock Exchange, but the Company intends to seek to have its security traded
on another stock exchange or the National Association of Securities Dealers
Automated Quotation System.
11. RESTATEMENT
Subsequent to the issuance of the Company's financial statements for the
years ended December 31, 1997 and 1996, it was determined that certain sales
were improperly recorded. As a result of the restatement, previously reported
sales for the year ended December 31, 1996 were reduced by approximately $1.1
million, resulting in a corresponding increase in previously reported sales for
the year ended December 31, 1997.
F-20
<PAGE> 59
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
11. RESTATEMENT -- (CONTINUED)
Additionally, previously reported sales for the year ended December 31, 1997
were reduced, prior to the impact of the increase relating to the 1996 reduction
discussed above, by approximately $9.0 million, resulting in an increase in
sales for the year ended December 31, 1998 (principally in the first quarter) of
approximately $7.5 million. As a result, the accompanying financial statements
as of December 31, 1997 and for the years ended December 31, 1997 and 1996
present the restated results.
A summary of the effects of the restatement follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
BALANCE SHEET
AS OF DECEMBER 31, 1997
-----------------------
AS
PREVIOUSLY AS
REPORTED RESTATED
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 253 $ 253
Accounts receivable.................................... 14,479 5,897
Inventories............................................ 5,989 6,031
Deferred income taxes.................................. 471 708
Prepaid expenses and other............................. 95 95
-------- --------
Total current assets.............................. 21,287 12,984
Machinery, equipment and leasehold improvements, net........ 5,695 5,695
Other assets................................................ 43 43
Excess of cost over net assets acquired, net................ 8,793 8,793
-------- --------
$ 35,818 $ 27,515
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit....................................... $ 674 $ 674
Accounts payable and accrued expenses.................. 3,312 3,626
-------- --------
Total current liabilities......................... 3,986 4,300
Other long-term liabilities................................. 460 460
Deferred income taxes....................................... 1,590 1,590
-------- --------
Total liabilities................................. 6,036 6,350
-------- --------
Stockholders' equity:
Common stock........................................... 136 136
Additional paid-in capital............................. 11,627 11,627
Retained earnings...................................... 41,015 35,536
Due from Former Parent and affiliates.................. (22,996) (26,134)
-------- --------
Total stockholders' equity........................ 29,782 21,165
-------- --------
$ 35,818 $ 27,515
======== ========
</TABLE>
F-21
<PAGE> 60
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
11. RESTATEMENT -- (CONTINUED)
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996
--------------------- ---------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Sales.................................................. $30,915 $23,085 $28,649 $27,516
------- ------- ------- -------
Costs and expenses:
Cost of goods sold................................ 11,912 12,153 15,034 14,710
Selling and administrative........................ 6,001 5,813 4,711 4,711
Depreciation...................................... 1,136 1,136 1,141 1,141
------- ------- ------- -------
19,049 19,102 20,886 20,562
------- ------- ------- -------
11,866 3,983 7,763 6,954
------- ------- ------- -------
Other, net:
Royalty income.................................... 785 785 128 128
Intercompany interest income...................... 305 305 305 305
Other income...................................... 36 36 68 68
Interest expense.................................. (159) (159) -- --
------- ------- ------- -------
967 967 501 501
------- ------- ------- -------
Income before taxes on income.......................... 12,833 4,950 8,264 7,455
Taxes on income........................................ 5,294 2,130 3,444 3,117
------- ------- ------- -------
Net income............................................. $ 7,539 $ 2,820 $ 4,820 $ 4,338
======= ======= ======= =======
Net income per share, basic and diluted................ $ 0.55 $ 0.21 $ 0.35 $ 0.32
======= ======= ======= =======
</TABLE>
Additionally, as of January 1, 1996 retained earnings have been reduced by
approximately $278,000, net of applicable income taxes, for the effects of
certain overbillings during 1991 through 1994.
* * * * * *
F-22
<PAGE> 61
SCHEDULE II
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE, CHARGED TO CHARGED TO BALANCE,
BEGINNING COSTS AND OTHER END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- --------- ---------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts
(deducted from accounts
receivable)....................... $168 $ 379 $416 (1) $ 131
==== ====== ====== ==== ======
Allowance for obsolescence (deducted
from inventory)................... $467 $2,289 $ -- $2,756
==== ====== ====== ==== ======
Year ended December 31, 1997 (as
restated):
Allowance for doubtful accounts
(deducted from accounts
receivable)....................... $245 $ 732 $809 (1) $ 168
==== ====== ====== ==== ======
Allowance for obsolescence (deducted
from inventory)................... $265 $ 202 $ -- $ 467
==== ====== ====== ==== ======
Year ended December 31, 1996 (as
restated):
Allowance for doubtful accounts
(deducted from accounts
receivable)....................... $130 $ 22 $(93)(1)(2) $ 245
==== ====== ====== ==== ======
Allowance for obsolescence (deducted
from inventory)................... $322 $ -- $ 57 $ 265
==== ====== ====== ==== ======
</TABLE>
- ---------------
(1) Accounts deemed to be uncollectible, net of recoveries.
(2) Amount of recoveries exceeded amounts deemed uncollectible during year.
S-1
<PAGE> 62
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
By: /s/ KENNETH H. TRAUB
-------------------------------------
Kenneth H. Traub
President and Chief Operating Officer
December 21, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ KENNETH H. TRAUB President, Chief Operating December 21, 1999
- --------------------------------------------- Officer and
Kenneth H. Traub Director (Principal Executive
Officer)
/s/ ALAN GOLDSTEIN Chief Financial Officer December 21, 1999
- --------------------------------------------- (Principal Financial and
Alan Goldstein Accounting Officer)
/s/ SALVATORE F. D'AMATO Chairman of the Board December 21, 1999
- ---------------------------------------------
Salvatore F. D'Amato
/s/ STEPHEN A. BENTON Director December 21, 1999
- ---------------------------------------------
Stephen A. Benton
/s/ C. GERALD GOLDSMITH Director December 21, 1999
- ---------------------------------------------
C. Gerald Goldsmith
</TABLE>
<PAGE> 1
Exhibit 10.8
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE
CONFIDENTIAL PORTIONS HAVE BEEN REDACTED AND ARE DENOTED BY [***]. THE
CONFIDENTIAL PORTIONS HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
Joel S. Lisker
Senior Vice President
Security & Risk Management
MASTERCARD INTERNATIONAL MasterCard
Franchise Management International
2000 Purchase Street ----------------------
Purchase, NY 10577-2509 [MASTERCARD LOGO]
914 249-5188
Fax 914 249-4256
Internet Home Page:
http://www.mastercard.com
June 29, 1998
Mr. Joshua C. Cantor
President
American Bank Note Holographics, Inc.
399 Executive Boulevard
Elmsford, New York 10523
Dear Joshua:
This letter agreement sets forth amendments to that agreement dated as of the
1st day of February, 1996 (the "Agreement") by and between MasterCard
International Incorporated ("MasterCard") and American Bank Note Holographics,
Inc. ("ABNH"). MasterCard and ABNH hereby agree as follows:
The first sentence of article 1.2 of the Agreement is amended by replacing the
words "five (5) years" with the words "seven (7) years."
Article 3.2 of the Agreement is deleted in its entirety and the last two
sentences of article 3.3 of the Agreement are deleted in their entirety.
The following two (2) sentences are added to the article 6.0 of the Agreement:
"For so long as the Agreement is in effect, MasterCard shall fully satisfy its
payment obligations to ABNH with respect to the manufacture and storage of
holograms by paying [***]. In addition, ABNH shall be obligated to promptly
forward to MasterCard a refund equal to [***]."
<PAGE> 2
Joshua C. Cantor
June 29, 1998
Page 2
Except as set forth herein, all other terms of the Agreement shall remain in
effect.
If this letter agreement is acceptable to ABNH, please so indicate by signing
below, where indicated, any by returning one of the two original copies of this
letter to my attention. This letter agreement will be effective as of the date
of your signature set forth below.
Very truly yours,
/s/ JOEL LISKER
Joel Lisker
Accepted and agreed to on behalf of American Bank Note Holographics, Inc.:
By: /s/ JOSHUA C. CANTOR
-----------------------------
Joshua C. Cantor, President
Date: 9/4/98
-----------------------------
cc: Nancy Meyer, Ellen O'Keeffe, Paul J. Paolucci, Michael Timko
<PAGE> 1
Exhibit 10.9
Joel S. Lisker
Senior Vice President
Security & Risk Management
MASTERCARD INTERNATIONAL MasterCard
Franchise Management International
2000 Purchase Street ----------------------
Purchase, NY 10577-2509 [MASTERCARD LOGO]
914 249-5188
Fax 914 249-4256
Internet Home Page:
http://www.mastercard.com
March 3, 1999
Mr. Kenneth H. Traub
President
American Bank Note Holographics, Inc.
399 Executive Boulevard
Elmsford, New York 10523
Dear Ken:
It has come to our attention that the agreement dated 1 February 1996 between
MasterCard International Incorporated ("MasterCard") and American Bank Note
Holographics, Inc. ("ABNH"), as subsequently amended by letter agreement dated
June 29, 1998, (together, the "Agreement") does not address events of
termination. Although MasterCard is confident that ABNH will have continued
success, it is imperative that we confirm that the Agreement would terminate for
bankruptcy filing, material breach, etc. Although this is our understanding,
terms to that effect do not appear in the Agreement. Therefore, we would ask
that the Agreement be amended by adding the new section set forth below.
"21.0 Termination. This Agreement may be terminated at the election of a party:
a. immediately in the event of a voluntary bankruptcy, or appointing of a
receiver for, or petition or application of such by the other party,
insolvency of a party, assignment for the benefit of creditors by a
party, or in the event that a substantial portion of the property of a
party is or becomes subject to levy, seizure, assignment or sale for
or by a creditor or governmental agency;
b. immediately if this Agreement or any material part thereof is declared
to be unlawful by a governmental agency, by a final decree of a court
of law with competent jurisdiction;
c. in the event of the material breach of this Agreement by the other
party, including, by way of example and not limitation, the failure of
ABNH to deliver holograms to MasterCard in a timely fashion and the
failure of MasterCard to make payment to ABNH as required, upon
sixty (60) days written notice to the breaching party describing the
breach; provided, if the breach is cured by the breaching party prior
to the expiration of the sixty (60) day notice period, this Agreement
shall not terminate."
<PAGE> 2
Mr. Kenneth Traub
March 3, 1999
Page two
Please indicate acceptance of this amendment by ABNH by signing and dating
below, where indicated, and by then returning this letter to my attention.
Please call me should you have any questions.
Sincerely,
/s/ JOEL S. LISKER
Joel S. Lisker
Senior Vice President
Security & Risk Management
cc: General Counsel, American Bank Note Holographics, Inc.
Michael J. Timko
Accepted and agreed to by American Bank Note Holographics, Inc. effective the
date first set forth above.
By: /s/ KENNETH H. TRAUB
-----------------------------
Name: Kenneth H. Traub
-----------------------------
Title: President
-----------------------------
Date: June 9, 1999
-----------------------------
<PAGE> 1
Exhibit 10.10
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as
of September 29, 1999, between FOOTHILL CAPITAL CORPORATION, a California
corporation ("Foothill"), with a place of business located at 11111 Santa Monica
Boulevard, Suite 1500, Los Angeles, California 90025-3333 and AMERICAN BANK NOTE
HOLOGRAPHICS, INC., a Delaware corporation ("Borrower"), with its chief
executive office located at 399 Executive Boulevard, Elmsford, New York 10523.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1. DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"Account Debtor" means any Person who is or who may become
obligated under, with respect to, or on account of, an Account.
"Accounts" means all currently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods or the rendition of services
by Borrower, irrespective of whether earned by performance, and any and all
credit insurance, guaranties, or security therefor.
"Advances" has the meaning set forth in Section 2.1(a).
"Affiliate" means, as applied to any Person, any other
Person who directly or indirectly controls, is controlled by, is under common
control with or is a director or officer of such Person . For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to vote 5% or more of the securities having ordinary voting power for the
election of directors or the direct or indirect power to direct the management
and policies of a Person.
"Agreement" has the meaning set forth in the preamble
hereto.
"Authorized Person" means any officer or other employee of
Borrower.
"Average Unused Portion of Maximum Revolving Amount" means,
as of any date of determination, (a) the Maximum Revolving Amount, less (b) the
sum of (i) the average Daily Balance of Advances that were outstanding during
the immediately preceding month, plus (ii) the average Daily Balance of the Term
Loan that was outstanding during the immediately preceding month, plus (iii) the
average Daily Balance of the Capital Expenditure Loan that was outstanding
during the immediately preceding month.
"Bankruptcy Code" means the United States Bankruptcy Code
(11 U.S.C. Section 101 et seq.), as amended, and any successor statute.
<PAGE> 2
"Benefit Plan" means a "defined benefit plan" (as defined
in Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or
any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of
ERISA).
"Borrower" has the meaning set forth in the preamble to
this Agreement.
"Borrower's Books" means all of Borrower's books and
records including: ledgers; records indicating, summarizing, or evidencing
Borrower's properties or assets (including the Collateral) or liabilities; all
information relating to Borrower's business operations or financial condition;
and all computer programs, disk or tape files, printouts, runs, or other
computer prepared information.
"Borrowing Base" has the meaning set forth in
Section 2.1(a).
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which national banks are authorized or required to
close.
"Capital Expenditure Line" has the meaning set forth in
Section 2.3.
"Capital Expenditure Loan" has the meaning set forth in
Section 2.3.
"Cash Interest Expense" shall mean, for any fiscal period
the sum of total cash interest expense (including that attributable to capital
lease obligations) paid by Borrower for such period with respect to all
outstanding Indebtedness of Borrower (including, without limitation, all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers acceptance financing and net costs under interest rate
protection agreements) to the extent such net costs are allocable to such period
in accordance with GAAP.
"Change of Control" shall be deemed to have occurred at
such time as a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly
or indirectly, of more than 40% of the total voting power of all classes of
stock then outstanding of Borrower entitled to vote in the election of
directors, if such "person" or "group" was not, on the Closing Date, a
"beneficial owner", directly or indirectly, of more than 40% of the total voting
power of all classes of stock of Borrower entitled to vote in the election of
directors.
"Closing Date" means the date of the first to occur of the
making of the initial Advance, the funding of the Term Loan, or the making of
the initial Capital Expenditure Loan.
"Code" means the New York Uniform Commercial Code.
"Collateral" means each of the following:
(a) the Accounts,
(b) Borrower's Books,
2
<PAGE> 3
(c) the Equipment,
(d) the General Intangibles,
(e) the Inventory,
(f) the Negotiable Collateral,
(g) the Investment Property and its components,
(h) the Real Property Collateral,
(i) any money, or other assets of Borrower that now or
hereafter come into the possession, custody, or control of Foothill, and
(j) the proceeds and products, whether tangible or
intangible, of any of the foregoing, including proceeds of insurance covering
any or all of the Collateral, and any and all Accounts, Borrower's Books,
Equipment, General Intangibles, Inventory, Investment Property, Negotiable
Collateral, Real Property, money, deposit accounts, or other tangible or
intangible property resulting from the sale, exchange, collection, or other
disposition of any of the foregoing, or any portion thereof or interest therein,
and the proceeds thereof.
"Collateral Access Agreement" means a landlord waiver,
mortgagee waiver, bailee letter, or acknowledgement agreement of any
warehouseman, processor, lessor, consignee, or other Person in possession of,
having a Lien upon, or having rights or interests in the Equipment or Inventory,
in each case, in form and substance satisfactory to Foothill.
"Collections" means all cash, checks, notes, instruments,
and other items of payment (including, insurance proceeds, proceeds of cash
sales, rental proceeds, and tax refunds).
"Consolidated Current Assets" means, as of any date of
determination, the aggregate amount of all current assets of Borrower that
would, in accordance with GAAP, be classified on a balance sheet as current
assets.
"Consolidated Current Liabilities" means, as of any date of
determination, the aggregate amount of all current liabilities of Borrower that
would, in accordance with GAAP, be classified on a balance sheet as current
liabilities. For purposes of this definition, all Obligations outstanding under
this Agreement shall be deemed to be current liabilities without regard to
whether they would be deemed to be so under GAAP.
"Consolidated Interest Expense" means for any period, the
Cash Interest Expense (net of cash interest income) of Borrower during such
period determined in accordance with GAAP consistently applied, and shall in any
event include, without limitation, interest on capitalized lease obligations and
shall exclude original issue discount amortization to the extent it is required
to be included in accordance with GAAP.
3
<PAGE> 4
"Daily Balance" means the amount of an Obligation owed at
the end of a given day.
"deems itself insecure" means that the Person deems itself
insecure in accordance with the provisions of Section 1208 of the Code.
"Default" means an event, condition, or default that, with
the giving of notice, the passage of time, or both, would be an Event of
Default.
"D&T" means Deloitte & Touche LLP.
"Designated Account" means account number 801201454 of
Borrower maintained with Borrower's Designated Account Bank, or such other
deposit account of Borrower (located within the United States) at Borrower's
Designated Account Bank which has been designated, in writing and from time to
time, by Borrower to Foothill.
"Designated Account Bank" means The Chase Manhattan Bank,
whose office is located at 52 Broadway, New York, New York, and whose ABA number
is 021000021, or such other financial institution (located within the United
States) which has been designated, in writing and from time to time, by Borrower
to Foothill.
"Dilution" means, in each case based upon the experience of
the immediately prior three months, the result of dividing the Dollar amount of
(a) bad debt write-downs, discounts, advertising, returns, promotions, credits,
or other dilution with respect to the Accounts, by (b) Borrower's Collections
(excluding extraordinary items) plus the Dollar amount of clause (a).
"Dilution Reserve" means, as of any date of determination,
an amount sufficient to reduce Foothill's advance rate against Eligible Accounts
as set forth in Section 2.1(a) by one percentage point for each percentage point
by which Dilution is in excess of 5.00%.
"Diners Club" means Diners Club International, Ltd., a
Delaware corporation.
"Disbursement Letter" means an instructional letter
executed and delivered by Borrower to Foothill regarding the extensions of
credit to be made on the Closing Date, the form and substance of which shall be
satisfactory to Foothill.
"Dollars or $" means United States dollars.
"Early Termination Premium" has the meaning set forth in
Section 3.6.
"EBITDA" means, for any period, the net income (or net
loss) of Borrower, for such period as determined in accordance with GAAP, (a)
plus, to the extent reflected in the changes in the statement of net income for
such period, the sum of, without duplication, the following for Borrower (i)
interest expense, (ii) taxes actually paid, (iii) depreciation and amortization
expense, (iv) extraordinary losses, and (v) Extraordinary IPO
4
<PAGE> 5
Related Expenses, and (b) minus, to the extent reflected in the changes in the
statement of net income for such period, extraordinary gains of Borrower.
"Eligible Accounts" shall mean, collectively, Eligible
Domestic Accounts and Eligible Foreign Accounts.
"Eligible Bill and Hold Inventory" means Inventory that has
been purchased by Master Card under a Qualified Production Contract and the
Account for which sale would satisfy all requirements for an Eligible Domestic
Account hereunder, except that such Inventory may not have been deemed to be
delivered to Master Card for all purposes and therefore clause (d) of the
definition of Eligible Domestic Accounts is not satisfied.
"Eligible Domestic Accounts" means those Accounts created
by Borrower in the ordinary course of business, that arise out of Borrower's
sale of goods or rendition of services, that strictly comply with each and all
of the representations and warranties respecting Accounts made by Borrower to
Foothill in the Loan Documents; provided, however, that standards of eligibility
may be fixed and revised from time to time by Foothill in Foothill's reasonable
credit judgment. Eligible Domestic Accounts shall not include the following:
(a) Accounts that the Account Debtor has failed to pay
within 90 days of invoice date or Accounts with selling terms of more than 45
days;
(b) Accounts owed by an Account Debtor where 50% or more
of all Accounts owed by that Account Debtor are deemed ineligible under clause
(a) above;
(c) Accounts with respect to which the Account Debtor is
an employee, Affiliate, or agent of Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional; provided, however, that the foregoing exclusion of Accounts with
respect to goods that are placed on "bill and hold" terms shall not apply if
Borrower shall have delivered to Foothill with respect to such Accounts (x) a
bill and hold letter from the subject Account Debtor in favor of, and in form
and substance satisfactory to, Foothill or (y) such other evidence as Foothill
shall require in its reasonable discretion regarding the delivery of the subject
Inventory to such Account Debtor;
(e) Accounts that are not payable in Dollars or with
respect to which the Account Debtor: (i) does not maintain its chief executive
office in the United States, or (ii) is not organized under the laws of the
United States or any State thereof, or (iii) is the government of any foreign
country or sovereign state, or of any state, province, municipality, or other
political subdivision thereof, or of any department, agency, public corporation,
or other instrumentality thereof;
(f) Accounts with respect to which the Account Debtor is
either (i) the United States or any department, agency, or instrumentality of
the United States (exclusive, however, of Accounts with respect to which
Borrower has complied, to the satisfaction of Foothill, with the Assignment of
Claims Act, 31 U.S.C. Section 3727), or (ii) any State of the United
5
<PAGE> 6
States (exclusive, however, of Accounts owed by any State that does not have a
statutory counterpart to the Assignment of Claims Act);
(g) Accounts with respect to which the Account Debtor is
a creditor of Borrower, has or has asserted a right of setoff, has disputed its
liability, or has made any claim with respect to the Account;
(h) Accounts with respect to an Account Debtor whose
total obligations owing to Borrower exceed 15% (or, (x) with respect to Master
Card, 30% or (y) with respect to 3M Corporation, 20%) of all Eligible Accounts,
to the extent of the obligations owing by such Account Debtor in excess of such
percentage;
(i) Accounts with respect to which the Account Debtor is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business;
(j) Accounts the collection of which Foothill, in its
reasonable credit judgment, believes to be doubtful by reason of the Account
Debtor's financial condition;
(k) Accounts with respect to which the goods giving rise
to such Account have not been shipped and billed to the Account Debtor, the
services giving rise to such Account have not been performed and accepted by the
Account Debtor, or the Account otherwise does not represent a final sale;
provided, however, that the foregoing requirement of "shipping" shall be deemed
to be satisfied if Borrower shall have delivered to Foothill with respect to
such Accounts (x) a bill and hold letter from the subject Account Debtor in
favor of and in form and substance satisfactory to, Foothill or (y) such other
evidence as Foothill shall require in its discretion regarding the delivery of
the subject Inventory to such Account Debtor;
(l) Accounts with respect to which the Account Debtor is
located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or
any other state that requires a creditor to file a Business Activity Report or
similar document in order to bring suit or otherwise enforce its remedies
against such Account Debtor in the courts or through any judicial process of
such state), unless Borrower has qualified to do business in New Jersey,
Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice
of Business Activities Report with the applicable division of taxation, the
department of revenue, or with such other state offices, as appropriate, for the
then-current year, or is exempt from such filing requirement; provided, however,
that the requirements of this clause (l) shall be effective on and after the
date that is fifteen (15) days after the Closing Date; and
(m) Accounts that represent progress payments or other
advance billings that are due prior to the completion of performance by Borrower
of the subject contract for goods or services.
"Eligible Foreign Accounts" means those Accounts that do
not qualify as Eligible Domestic Accounts solely because the Account Debtor with
respect to such Accounts (i) does not maintain its chief executive office in the
United States or (ii) is not organized under the laws of the United States or
any State thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or other political
subdivision thereof, or of any department, agency, province, municipality, or
other political subdivision thereof, or of
6
<PAGE> 7
any department, agency, public corporation, or other instrumentality thereof,
but either (a) such Accounts are supported by an irrevocable letter of credit
satisfactory to Foothill (as to form, substance, and issuer or domestic
confirming bank) that has been delivered to Foothill and is directly drawable by
Foothill, or (b) such Accounts are covered by credit insurance in form and
amount, and by an insurer, satisfactory to Foothill.
"Eligible Inventory" means Inventory consisting of finished
goods held for sale in the ordinary course of Borrower's business and raw
materials for such finished goods, that are located at or in-transit between
Borrower's premises identified on Schedule E-1, that strictly comply with each
and all of the representations and warranties respecting Inventory made by
Borrower to Foothill in the Loan Documents, and that are and at all times
continue to be acceptable to Foothill in all respects; provided, however, that
standards of eligibility may be fixed and revised from time to time by Foothill
in Foothill's reasonable credit judgment. In determining the amount to be so
included, Inventory shall be valued at the lower of cost or market on a basis
consistent with Borrower's current and historical accounting practices. An item
of Inventory shall not be included in Eligible Inventory if:
(a) it is not owned solely by Borrower or Borrower does
not have good, valid, and marketable title thereto;
(b) it is not either (x) located at one of the locations
set forth on Schedule E-1 or (y) in transit between one of the locations set
forth on Exhibit E-1;
(c) it is not located on property owned or leased by
Borrower or in a contract warehouse, in each case, subject to a Collateral
Access Agreement executed by the mortgagee, lessor, the warehouseman, or other
third party, as the case may be, and segregated or otherwise separately
identifiable from goods of others, if any, stored on the premises;
(d) it is not subject to a valid and perfected first
priority security interest in favor of Foothill;
(e) it consists of goods returned or rejected by
Borrower's customers or goods in transit;
(f) it is obsolete or slow moving, a restrictive or
custom item, work-in-process, a component that is not part of finished goods, or
constitutes spare parts, packaging and shipping materials, supplies used or
consumed in Borrower's business, Inventory subject to a Lien in favor of any
third Person, bill and hold goods, defective goods, "seconds," or Inventory
acquired on consignment;
(g) it consists of finished goods Inventory and it is
(x) not subject to a Qualified Purchase Order; or (y) not produced under a
Qualified Production Contract pursuant to the order of the customer thereunder;
and
(h) it is subject to any license, agreement or other
arrangement which could adversely affect the right or ability of Foothill to
foreclose upon, sell and/or dispose of such Inventory, or which would be
reasonably expected to have an adverse effect on the value of such Inventory as
Collateral, unless Foothill shall have received such Collateral Access
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<PAGE> 8
Agreements or other agreements with respect to such Inventory as Foothill shall
require in its discretion.
"Equipment" means all of Borrower's present and hereafter
acquired machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods
(other than consumer goods, farm products, or Inventory), wherever located,
including, (a) any assets acquired by Borrower with the proceeds of a Capital
Expenditure Loan, (b) any interest of Borrower in any of the foregoing, and (c)
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act
of 1974, 29 U.S.C. Sections 1000 et seq., amendments thereto, successor
statutes, and regulations or guidance promulgated thereunder.
"ERISA Affiliate" means (a) any corporation whose employees
are treated as employed by the same employer as the employees of Borrower under
IRC Section 414(b), (b) any trade or business whose employees are treated as
employed by the same employer as the employees of Borrower under IRC Section
414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the
IRC, any organization that is a member of an affiliated service group of which
Borrower is a member under IRC Section 414(m), or (d) solely for purposes of
Section 302 of ERISA and Section 412 of the IRC, any party that is a party to an
arrangement with Borrower and whose employees are aggregated with the employees
of Borrower under IRC Section 414(o).
"ERISA Event" means (a) a Reportable Event with respect to
any Benefit Plan or Multiemployer Plan , (b) the withdrawal of Borrower, any of
its Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in
which it was a "substantial employer" (as defined in Section 4001(a)(2) of
ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a
distress termination (as described in Section 4041(c) of ERISA), (d) the
institution by the PBGC of proceedings to terminate a Benefit Plan or
Multiemployer Plan, (e) any event or condition (i) which constitutes grounds
under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the
appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan,
or (ii) that may result in termination of a Multiemployer Plan pursuant to
Section 4041A of ERISA, (f) the partial or complete withdrawal within the
meaning of Sections 4203 and 4205 of ERISA, of Borrower, any of its Subsidiaries
or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to
any Plan under Section 401(a)(29) of the IRC by Borrower or its Subsidiaries or
any of their ERISA Affiliates.
"Event of Default" has the meaning set forth in Section 8.
"Existing Lender" means The Chase Manhattan Bank and the
other lenders under the Existing Loan Facility.
"Existing Loan Facility" means the loan facility relating
to the Credit Agreement, dated as of July 20, 1998, among the Borrower, the
guarantors named therein, the lenders named therein, Societe Generale, as
documentation agent, and The Chase Manhattan
8
<PAGE> 9
Bank, as administrative and collateral agent, as amended and waived by a certain
Amendment and Waiver Agreement, dated as of July 20, 1999, among the parties.
"Extraordinary IPO Related Expenses" means all reasonable
costs incurred by Borrower related to, without duplication: (i) the
investigation commenced on January, 1999 conducted by the Borrower's Audit
Committee, (ii) defense and settlement of the litigation set forth in paragraphs
1 and 2 on Schedule 5.10 hereto, (iii) the investigation of Borrower by the
Securities and Exchange Commission and the United States Attorney for the
Southern District of New York, and (iv) the Company's audit conducted in 1999 to
the extent such costs exceed $200,000, in each case, regardless of whether such
costs would be characterized under GAAP as extraordinary or non-recurring items;
"FEIN" means Federal Employer Identification Number.
"Foothill" has the meaning set forth in the preamble to
this Agreement.
"Foothill Account" has the meaning set forth in
Section 2.6.
"Foothill Expenses" means all: costs or expenses (including
taxes, and insurance premiums) required to be paid by Borrower under any of the
Loan Documents that are paid or incurred by Foothill; fees or charges paid or
incurred by Foothill in connection with Foothill's transactions with Borrower,
including, fees or charges for photocopying, notarization, couriers and
messengers, telecommunication, public record searches (including tax lien,
litigation, and UCC searches and including searches with the patent and
trademark office, the copyright office, or the department of motor vehicles),
filing, recording, publication, appraisal (including periodic Personal Property
Collateral or Real Property Collateral appraisals), real estate surveys, real
estate title policies and endorsements, and environmental audits; costs and
expenses incurred by Foothill in the disbursement of funds to Borrower (by wire
transfer or otherwise); charges paid or incurred by Foothill resulting from the
dishonor of checks; costs and expenses paid or incurred by Foothill to correct
any default or enforce any provision of the Loan Documents, or in gaining
possession of, maintaining, handling, preserving, storing, shipping, selling,
preparing for sale, or advertising to sell the Personal Property Collateral or
the Real Property Collateral, or any portion thereof, irrespective of whether a
sale is consummated; costs and expenses paid or incurred by Foothill in
examining Borrower's Books; costs and expenses of third party claims or any
other suit paid or incurred by Foothill in enforcing or defending the Loan
Documents or in connection with the transactions contemplated by the Loan
Documents or Foothill's relationship with Borrower or any guarantor; and
Foothill's reasonable attorneys fees and expenses incurred in advising,
structuring, drafting, reviewing, administering, amending, terminating,
enforcing (including attorneys fees and expenses incurred in connection with a
"workout," a "restructuring," or an Insolvency Proceeding concerning Borrower or
any guarantor of the Obligations), defending, or concerning the Loan Documents,
irrespective of whether suit is brought.
"GAAP" means generally accepted accounting principles as in
effect from time to time in the United States, consistently applied.
9
<PAGE> 10
"General Intangibles" means all of Borrower's present and
future general intangibles and other personal property (including contract
rights, rights arising under common law, statutes, or regulations, choses or
things in action, goodwill, patents, trade names, trademarks, servicemarks,
copyrights, blueprints, drawings, purchase orders, customer lists, monies due or
recoverable from pension funds, route lists, rights to payment and other rights
under any royalty or licensing agreements, infringement claims, computer
programs, information contained on computer disks or tapes, literature, reports,
catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax
refund claims), other than goods, Accounts, Negotiable Collateral and Investment
Property.
"Governing Documents" means the certificate or articles of
incorporation, by-laws, or other organizational or governing documents of any
Person.
"Hazardous Materials" means (a) substances that are defined
or listed in, or otherwise classified pursuant to, any applicable laws or
regulations as "hazardous substances," "hazardous materials," "hazardous
wastes," "toxic substances," or any other formulation intended to define, list,
or classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development, or production of crude oil,
natural gas, or geothermal resources, (c) any flammable substances or explosives
or any radioactive materials, and (d) asbestos in any form or electrical
equipment that contains any oil or dielectric fluid containing levels of
polychlorinated biphenyls in excess of 50 parts per million.
"Indebtedness" means: (a) all obligations of Borrower for
borrowed money, (b) all obligations of Borrower evidenced by bonds, debentures,
notes, or other similar instruments and all reimbursement or other obligations
of Borrower in respect of letters of credit, bankers acceptances, interest rate
swaps, or other financial products, (c) all obligations of Borrower under
capital leases, (d) all obligations or liabilities of others secured by a Lien
on any property or asset of Borrower, irrespective of whether such obligation or
liability is assumed, and (e) any obligation of Borrower guaranteeing or
intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or
sold with recourse to Borrower) any indebtedness, lease, dividend, letter of
credit, or other obligation of any other Person. The term "Indebtedness" shall
exclude trade payables owed by Borrower and arising in Borrower's ordinary
course of business.
"Insolvency Proceeding" means any proceeding commenced by
or against any Person under any provision of the Bankruptcy Code or under any
other bankruptcy or insolvency law, assignments for the benefit of creditors,
formal or informal moratoria, compositions, extensions generally with creditors,
or proceedings seeking reorganization, arrangement, or other similar relief.
"Intangible Assets" means, with respect to any Person, that
portion of the book value of all of such Person's assets that would be treated
as intangibles under GAAP.
"Interest Coverage Ratio" means for any period, the ratio
of (a) EBITDA to (b) Consolidated Interest Expense.
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<PAGE> 11
"Interest Margin" shall mean one and one-half percent
(1.50%) per annum; provided, however, that if Borrower shall have complied with
each of (i) clause (w) of the definition of Statement/Systems Date by November
15, 1999; (ii) clause (x) of the definition of Statement/System Date by November
30, 1999 and (iii) clause (y) of the definition of Statement/System Date by
November 15, 1999, each as determined in good faith by Foothill, the term
"Interest Margin" shall mean one and one-quarter percent (1.25%) per annum. In
the event that (a) the Borrower has met the conditions set forth in the
foregoing clauses (i), (ii) and (iii) within the time periods set forth therein
or (b) Borrower has delivered to Foothill on a timely basis an audited financial
statement of the Borrower pursuant to Section 6.3(b) of this Agreement for the
fiscal year ending December 31, 2000, then Borrower shall qualify for additional
performance pricing ("Additional Performance Pricing") and effective with the
date that either clause (a) or clause (b) above, as the case may be, is
satisfied, Interest Margin shall be determined as follows:
<TABLE>
<CAPTION>
EBITDA for Twelve Month Interest Margin
Period ending on Fiscal ---------------
Quarter Immediately Preceding
Date of Determination
---------------------
<S> <C>
less than $5,500,000 1.25%(1) 1.50%(2)
$5,500,000 to $7,000,000 1.00%
$7,000,001 or greater 0.50%
</TABLE>
The foregoing calculation shall be determined by Foothill
based upon the financial statements delivered by Borrower pursuant to Section
6.3 of this Agreement for the twelve months ending on the fiscal quarter
immediately preceding the date of determination, with any change in Interest
Margin being effective as of the date of receipt of the foregoing financial
statements by Foothill. The financial statements delivered under Section 6.3(a)
shall comply with the requirements of such Section 6.3(a) and shall be reviewed
by D&T or other nationally recognized certified public accountants and the
financial statements delivered under Section 6.3(b) shall comply with the
requirements of such Section 6.3(b). In the event that any financial statements
shall not be delivered on a timely basis as required under Section 6.3, then
(subject to Section 2.5(b)),until such Section 6.3 is complied with, the
Interest Margin shall be determined without giving effect to the foregoing
Additional Performance Pricing.
"Inventory" means all present and future inventory in which
Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of Borrower's present and future
raw materials, work in process, finished goods, and packing and shipping
materials, wherever located.
"Inventory Reserves" means reserves (reasonably determined
from time to time by Foothill) for (a) the estimated costs relating to unpaid
freight charges, warehousing or
- ---------------------
(1) Applicable if clause (a) of the definition of "Interest Margin" has been
satisfied.
(2) Applicable in the event that clause (a) of the definition of "Interest
Margin" has not been satisfied, but clause (b) of the definition of
"Interest Margin" has been satisfied.
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<PAGE> 12
storage charges, taxes, duties, and other similar unpaid costs, plus (b) the
estimated reclamation claims of unpaid sellers of Inventory sold to Borrower.
"Inventory Sublimit" shall mean $1,000,000; provided,
however, that on and after the Statement/Systems Date, the term Inventory
Sublimit shall mean $1,250,000.
"Investment Property" means "investment property" as that
term is defined in Section 9-115 of the Code.
"IRC" means the Internal Revenue Code of 1986, as amended,
and the regulations promulgated thereunder.
"IRS" means the Internal Revenue Service.
"Lien" means any interest in property securing an
obligation owed to, or a claim by, any Person other than the owner of the
property, whether such interest shall be based on the common law, statute, or
contract, whether such interest shall be recorded or perfected, and whether such
interest shall be contingent upon the occurrence of some future event or events
or the existence of some future circumstance or circumstances, including the
lien or security interest arising from a mortgage, deed of trust, encumbrance,
pledge, hypothecation, assignment, deposit arrangement, security agreement,
adverse claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting Real
Property.
"Loan Account" has the meaning set forth in Section 2.9.
"Loan Documents" means this Agreement, the Disbursement
Letter the Lockbox Agreements, any note or notes executed by Borrower and
payable to Foothill, and any other agreement entered into, now or in the future,
in connection with this Agreement.
"Lockbox Account" shall mean a depositary account
established pursuant to one of the Lockbox Agreements.
"Lockbox Agreements" means those certain Lockbox Operating
Procedural Agreements and those certain Depository Account Agreements, in form
and substance satisfactory to Foothill, each of which is among Borrower,
Foothill, and one of the Lockbox Banks.
"Lockbox Banks" means The Chase Manhattan Bank, or such
other banks as may be agreed to by Borrower and Foothill from time to time.
"Lockboxes" has the meaning set forth in Section 2.6.
"Master Card" means Master Card International Incorporated,
a Delaware corporation.
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<PAGE> 13
"MC Contract" means the Qualified Production Contract
referenced in clause (i) of the definition of Qualified Production Contract.
"Material Adverse Change" means (a) a material adverse
change in the business, operations, results of operations, assets, liabilities
or condition (financial or otherwise) of Borrower, (b) the material impairment
of Borrower's ability to perform its obligations under the Loan Documents to
which it is a party or of Foothill to enforce the Obligations or realize upon
the Collateral, (c) a material adverse effect on the value of the Collateral or
the amount that Foothill would be likely to receive (after giving consideration
to delays in payment and costs of enforcement) in the liquidation of such
Collateral, or (d) a material impairment of the priority of Foothill's Liens
with respect to the Collateral.
"Maximum Revolving Amount" means $10,000,000; provided,
however, that on and after the Maximum Revolving Amount Increase Date, Maximum
Revolving Amount shall mean up to $15,000,000.
"Maximum Revolving Amount Increase Date" shall mean the
date on which Foothill shall agree in its sole discretion in writing (pursuant
to Borrower's request) to increase the Maximum Revolving Amount to up to
$15,000,000; provided, however, that without limiting Borrower's discretion as
aforesaid, it is contemplated that such increase will be used by Borrower in
connection with acquisitions proposed to be made by Borrower, that Foothill may
insist upon evidence of compliance by the Borrower with this Agreement both
before and after giving effect to such increase in Maximum Revolving Amount and
related transactions and that Foothill may require the payment of certain fees
in connection with such increase in Maximum Revolving Amount.
"Multiemployer Plan" means a "multiemployer plan" (as
defined in Section 4001(a)(3) of ERISA) to which Borrower, any of its
Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to
contribute, within the past six years.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit, notes, drafts, instruments, documents, personal
property leases (wherein Borrower is the lessor), chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all loans, Advances, debts, principal,
interest (including any interest that, but for the provisions of the Bankruptcy
Code, would have accrued), premiums (including Early Termination Premiums),
liabilities (including all amounts charged to Borrower's Loan Account pursuant
hereto), obligations, fees, charges, costs, or Foothill Expenses (including any
fees or expenses that, but for the provisions of the Bankruptcy Code, would have
accrued), lease payments, guaranties, covenants, and duties owing by Borrower to
Foothill of any kind and description (whether pursuant to or evidenced by the
Loan Documents or pursuant to any other agreement between Foothill and Borrower,
and irrespective of whether for the payment of money), whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including any debt, liability, or obligation owing from
Borrower to others that Foothill may have obtained by assignment or otherwise,
and further including all interest not paid when due and all Foothill Expenses
that Borrower is required to pay or reimburse by the Loan Documents, by law, or
otherwise.
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<PAGE> 14
"Overadvance" has the meaning set forth in Section 2.4.
"Participant" means any Person to which Foothill has sold a
participation interest in its rights under the Loan Documents.
"Pay-Off Letter" means a letter, in form and substance
reasonably satisfactory to Foothill, from Existing Lender respecting the amount
necessary to repay in full all of the obligations of Borrower owing to Existing
Lender and obtain a termination or release of all of the Liens existing in favor
of Existing Lender in and to the properties or assets of Borrower.
"PBGC" means the Pension Benefit Guaranty Corporation as
defined in Title IV of ERISA, or any successor thereto.
"Permitted Liens" means (a) Liens held by Foothill, (b)
Liens for unpaid taxes that either (i) are not yet due and payable or (ii) are
the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the
interests of lessors under operating leases and purchase money Liens of lessors
under capital leases to the extent that the acquisition or lease of the
underlying asset is permitted under Section 7.21 and so long as the Lien only
attaches to the asset purchased or acquired and only secures the purchase price
of the asset, (e) Liens arising by operation of law in favor of warehousemen,
landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in
the ordinary course of business of Borrower and not in connection with the
borrowing of money, and which Liens either (i) are for sums not yet due and
payable, or (ii) are the subject of Permitted Protests, (f) Liens arising from
deposits made in connection with obtaining worker's compensation or other
unemployment insurance, (g) Liens or deposits to secure performance of bids,
tenders, or leases (to the extent permitted under this Agreement), incurred in
the ordinary course of business of Borrower and not in connection with the
borrowing of money, (h) Liens arising by reason of security for surety or appeal
bonds in the ordinary course of business of Borrower, (i) Liens of or resulting
from any judgment or award that could not reasonably be expected to cause a
Material Adverse Change and as to which the time for the appeal or petition for
rehearing of which has not yet expired, or in respect of which Borrower is in
good faith prosecuting an appeal or proceeding for a review, and in respect of
which a stay of execution pending such appeal or proceeding for review has been
secured, (j) Liens with respect to the Real Property Collateral that are
exceptions to the commitments for title insurance issued in connection with the
Mortgages, as accepted by Foothill, (k) with respect to any Real Property that
is not part of the Real Property Collateral, easements, rights of way, zoning
and similar covenants and restrictions, and similar encumbrances that
customarily exist on properties of Persons engaged in similar activities and
similarly situated and that in any event do not materially interfere with or
impair the use or operation of the Collateral by Borrower or the value of
Foothill's Lien thereon or therein, or materially interfere with the ordinary
conduct of the business of Borrower and (l) Liens in favor of the Existing
Lender that will be released immediately upon funding of the initial Advances.
"Permitted Protest" means the right of Borrower to protest
any Lien other than any such Lien that secures the Obligations, tax (other than
payroll taxes or taxes that are the subject of a United States federal tax
lien), ERISA-related obligations or rental payments, provided that (a) a
reserve with respect to such obligation is established on the books of Borrower
in
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<PAGE> 15
an amount that is reasonably satisfactory to Foothill, (b) any such protest
is instituted and diligently prosecuted by Borrower in good faith, and (c)
Foothill is satisfied that, while any such protest is pending, there will be no
impairment of the enforceability, validity, or priority of any of the Liens of
Foothill in and to the Collateral.
"Permitted Subordinated Debt" means Indebtedness for
borrowed money of the Borrower that is (x) unsecured and (y) pursuant to terms
(including, without limitation, subordination terms) acceptable in all respects
to Foothill in writing.
"Person" means and includes natural persons, corporations,
limited liability companies, limited partnerships, general partnerships, limited
liability partnerships, joint ventures, trusts, land trusts, business trusts, or
other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.
"Personal Property Collateral" means all Collateral other
than the Real Property Collateral.
"Plan" means any employee benefit plan within the meaning
of Section 3(3) of ERISA, maintained for employees of Borrower or any ERISA
Affiliate or any such Plan to which Borrower or any ERISA Affiliate is required
to contribute on behalf of any of its employees.
"Qualified Production Contract" means, collectively, (x)
the Production Agreement dated as of February 1, 1996 between Master Card and
Borrower and (y) the Agreement dated January 1, 1997 between Diners Club and
Borrower, each as amended, restated, modified and supplemented from time to time
in accordance with Section 7.3 hereof.
"Qualified Purchase Order" means a written purchase order
by an Account Debtor of Borrower evidencing such Account Debtor's obligation to
pay the purchase price for finished goods Inventory. In no event shall a
purchase order be a Qualified Purchase Order: unless it was issued in connection
with a transaction in the ordinary course of Borrower's business;
(a) if the Account Debtor with respect to such purchase
order is an employee, Affiliate, or agent of
Borrower;
(b) if the purchase price under such purchase order is
not payable in Dollars or the Account Debtor : (i)
does not maintain its chief executive office in the
United States, or (ii) is not organized under the
laws of the United States or any State thereof, or
(iii) is the government of any foreign country or
sovereign state, or of any state, province,
municipality, or other political subdivision
thereof, or of any department, agency, public
corporation, or other instrumentality thereof;
(c) if the Account Debtor with respect to such purchase
order is either (i) the United States or any
department, agency, or instrumentality
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<PAGE> 16
of the United States (exclusive, however, of
purchase orders with respect to which Borrower has
complied, to the satisfaction of Foothill, with the
Assignment of Claims Act, 31 U.S.C. Section 3727),
or (ii) any State of the United States (exclusive,
however, of purchase orders issued by any State that
does not have a statutory counterpart to the
Assignment of Claims Act);
(d) if the Account Debtor is a creditor of Borrower, has
or has asserted a right of setoff, has disputed its
liability, or has made any claim with respect to the
purchase order;
(e) if the Account Debtor is subject to any Insolvency
Proceeding, or becomes insolvent, or goes out of
business;
(f) if Foothill, in its reasonable credit judgment,
believes that the creditworthiness of the Account
Debtor is unacceptable by reason of the Account
Debtor's financial condition;
(g) if the Account Debtor is located in the states of
New Jersey, Minnesota, Indiana, or West Virginia (or
any other state that requires a creditor to file a
Business Activity Report or similar document in
order to bring suit or otherwise enforce its
remedies against such Account Debtor in the courts
or through any judicial process of such state),
unless Borrower has qualified to do business in New
Jersey, Minnesota, Indiana, West Virginia, or such
other states, or has filed a Notice of Business
Activities Report with the applicable division of
taxation, the department of revenue, or with such
other state offices, as appropriate, for the
then-current year, or is exempt from such filing
requirement; provided, however, that the
requirements of this clause (g) shall be effective
on and after the date that is fifteen (15) days
after the Closing Date; and
(h) if the finished goods Inventory that is subject to
the purchase order has not been produced in
accordance with the requirements of the purchase
order, or the purchase order is for any other reason
not the enforceable and binding obligation of the
Account Debtor issuing such purchase order.
"Real Property" means any estates or interests in real
property now owned or hereafter acquired by Borrower.
"Real Property Collateral" means the parcel or parcels of
real property and the related improvements thereto identified on Schedule R-1,
and any Real Property hereafter acquired by Borrower.
"Reference Rate" means the variable rate of interest, per
annum, most recently announced by Norwest Bank Minnesota, National Association,
or any successor thereto,
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as its "base rate," irrespective of whether such announced rate is the best rate
available from such financial institution.
"Renewal Date" has the meaning set forth in Section 3.4.
"Reportable Event" means any of the events described in
Section 4043(c) of ERISA or the regulations thereunder other than a Reportable
Event as to which the provision of 30 days notice to the PBGC is waived under
applicable regulations.
"Retiree Health Plan" means an "employee welfare benefit
plan" within the meaning of Section 3(1) of ERISA that provides benefits to
individuals after termination of their employment, other than as required by
Section 601 of ERISA.
"Solvent" means, with respect to any Person on a particular
date, that on such date (a) at fair valuations, all of the properties and assets
of such Person are greater than the sum of the debts, including contingent
liabilities, of such Person, (b) the present fair salable value of the
properties and assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize upon its
properties and assets and pay its debts and other liabilities, contingent
obligations and other commitments as they mature in the normal course of
business, (d) such Person does not intend to, and does not believe that it will,
incur debts beyond such Person's ability to pay as such debts mature, and (e)
such Person is not engaged in business or a transaction, and is not about to
engage in business or a transaction, for which such Person's properties and
assets would constitute unreasonably small capital after giving due
consideration to the prevailing practices in the industry in which such Person
is engaged. In computing the amount of contingent liabilities at any time, it is
intended that such liabilities will be computed at the amount that, in light of
all the facts and circumstances existing at such time, represents the amount
that reasonably can be expected to become an actual or matured liability.
"Statement/Systems Date" shall mean the date that Foothill
has (w) received audited financial statements (including, without limitation,
balance sheet and income statement) of the Borrower for the fiscal years of the
Borrower ended 1996, 1997 and 1998, each certified by Deloitte and Touche or
other nationally recognized certified public accountants and not, in Foothill's
reasonable judgment, varying substantially from the restated financial
statements for the fiscal years 1996, 1997 and 1998 as delivered to Foothill on
or before the Closing Date (other than certain additional Inventory writedowns
that may be proposed by the Borrower and have been approved by D&T), (x)
received financial statements (including, without limitation, balance sheet and
income statement) of the Borrower for the fiscal quarters of the Borrower ended
March 31, 1999 and June 30, 1999, each reviewed by Deloitte & Touche or other
nationally recognized certified public accountants and not, in Foothill's
reasonable judgment, varying substantially from the restated financial
statements for the fiscal quarters ended March 31, 1999 and June 30, 1999 as
delivered to Foothill on or before the Closing Date and (y) Foothill shall have
determined, in its reasonable judgment, that Borrower has completed the upgrade
of its inventory management system in accordance with the specifications set
forth on Schedule 1.1-S hereto.
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"Subsidiary" of a Person means a corporation, partnership,
limited liability company, or other entity in which that Person directly or
indirectly owns or controls the shares of stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors (or
appoint other comparable managers) of such corporation, partnership, limited
liability company, or other entity.
"Term Loan" has the meaning set forth in Section 2.2.
"3M Corporation" means Minnesota Mining and Manufacturing
Company, a Delaware corporation.
"Undrawn Availability" shall mean the difference (if
greater than zero) between (a) the lesser of (i) the Maximum Revolving Amount
less the sum of (x) the outstanding principal balance of the Term Loan and (y)
the outstanding principal balance of the Capital Expenditure Loans and (ii) the
Borrowing Base, and (b) the sum of (x) the outstanding principal balance of the
Advances, (y) all fees and expenses incurred or to be incurred by Borrower in
connection with the transactions contemplated under this Agreement that are due
as of the date of determination; and (z) all accounts payable of Borrower that
are more than 60 days past due.
"Voidable Transfer" has the meaning set forth in Section
15.8.
"Year 2000 Problem" shall have the meaning set forth in
Section 5.15.
1.2. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP. When used herein, the
term "financial statements" shall include the notes and schedules thereto.
Whenever the term "Borrower" is used in respect of a financial covenant or a
related definition, it shall be understood to mean Borrower and its Subsidiaries
(if any) on a consolidated basis unless the context clearly requires otherwise.
1.3. CODE. Any terms used in this Agreement that are defined in
the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
1.4. CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the term "including" is not limiting, and the
term "or" has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or." The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. An Event of Default
shall "continue" or be "continuing" until such Event of Default has been waived
in writing by Foothill. Section, subsection, clause, schedule, and exhibit
references are to this Agreement unless otherwise specified. Any reference in
this Agreement or in the Loan Documents to this Agreement or any of the Loan
Documents shall include all alterations, amendments, changes, extensions,
modifications, renewals, replacements, substitutions, and supplements, thereto
and thereof, as applicable.
1.5. SCHEDULES AND EXHIBITS. All of the schedules and exhibits
attached to this Agreement shall be deemed incorporated herein by reference.
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2. LOAN AND TERMS OF PAYMENT.
2.1. REVOLVING ADVANCES.
(a) Subject to the terms and conditions of this
Agreement, Foothill agrees to make advances ("Advances") to Borrower in an
amount outstanding not to exceed at any one time the lesser of (i) the Maximum
Revolving Amount less the sum of (x) the outstanding principal balance of the
Term Loan and (y) the outstanding principal balance of the Capital Expenditure
Loan, or (ii) the Borrowing Base, less the aggregate amount of the Inventory
Reserves. For purposes of this Agreement, "Borrowing Base", as of any date of
determination, shall mean the result of:
(x) the lesser of (i) the sum of (a) 85% of
Eligible Domestic Accounts and (b) the lesser of (x) $750,000 and
(y) 75% of Eligible Foreign Accounts, less, in each of the
foregoing instances, the amount, if any, of the Dilution Reserve,
and (ii) an amount equal to Borrower's Collections with respect to
Accounts for the immediately preceding 60 day period, plus
(y) the lowest of (i) the Inventory Sublimit,
(ii) 55% of the value of Eligible Inventory and Eligible Bill and
Hold Inventory, and (iii) 100% of the amount of credit
availability created by clause (x) above, minus the Inventory
Reserves, minus
(z) the aggregate amount of reserves, if any,
established by Foothill under Section 2.1(b).
(b) Anything to the contrary in Section 2.1(a) or
elsewhere in this Agreement notwithstanding, Foothill shall have the right to
establish reserves against the Borrowing Base on account of, without
duplication, (i) sums that Borrower is required to pay (such as taxes,
assessments, insurance premiums, or, in the case of leased assets or leased real
property, rents or other amounts payable under such leases) and has failed to
pay under this Agreement or any other Loan Document, (ii) amounts owing by
Borrower to any Person to the extent secured by a Lien on, or trust over, any of
the Collateral, which Lien or trust, in the reasonable determination of Foothill
(from the perspective of an asset-based lender), would be likely to have a
priority superior to the Liens of Foothill (such as landlord liens, ad valorem
taxes, or sales taxes where given priority under applicable law) in and to such
item of Collateral, (iii) events or amounts that may have a material adverse
effect on the perfection, priority or enforceability of Foothill's Lien in the
Collateral, (iv) any other events or amounts that may have a material adverse
effect on the value of the Collateral to Foothill, (v) commission charges
payable to Persons other than the Borrower in connection with Eligible Accounts;
and (vi) for penalty charges payable to customers under Qualified Production
Contracts.
(c) Foothill shall have no obligation to make Advances
hereunder to the extent they would cause the outstanding Obligations (other than
under the Term Loan or the Capital Expenditure Loans) to exceed the Maximum
Revolving Amount.
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(d) Amounts borrowed pursuant to this Section 2.1 may be
repaid and, subject to the terms and conditions of this Agreement, reborrowed at
any time during the term of this Agreement.
2.2. TERM LOAN. Foothill has agreed to make a term loan (the
"Term Loan") to Borrower in the original principal amount of $1,000,000. The
Term Loan shall be repaid in 60 equal installments of principal in the amount of
$16,666.67 each.
Each such installment shall be due and payable on the first day of each month
commencing on the first day of the fourth month following the Closing Date and
continuing on the first day of each succeeding month until and including the
date on which the unpaid balance of the Term Loan is paid in full. The
outstanding principal balance and all accrued and unpaid interest under the Term
Loan shall be due and payable upon the termination of this Agreement, whether by
its terms, by prepayment, by acceleration, or otherwise. The unpaid principal
balance of the Term Loan may be prepaid in whole or in part without penalty or
premium at any time during the term of this Agreement upon 30 days prior written
notice by Borrower to Foothill, all such prepaid amounts to be applied to the
installments due on the Term Loan in the inverse order of their maturity. All
amounts outstanding under the Term Loan shall constitute Obligations.
2.3. CAPITAL EXPENDITURE LINE. Subject to the terms and
conditions of this Agreement, Foothill may, in its sole discretion, make a
series of term loans to Borrower (each, a "Capital Expenditure Loan") in an
aggregate amount at any one time outstanding not to exceed $2,000,000 (the
"Capital Expenditure Line"). Each Capital Expenditure Loan shall be repayable in
60 equal monthly installments of principal, such installments to be payable on
the first day of each month commencing with the first day of the first month
following the date on which the Capital Expenditure Loan is made and continuing
on the first day of each succeeding month until and including the date on which
the unpaid balance of the Capital Expenditure Loan is paid in full. The
outstanding principal balance and all accrued and unpaid interest under each
Capital Expenditure Loan shall be due and payable upon the termination of this
Agreement, whether by its terms, by prepayment, by acceleration, or otherwise.
Each Capital Expenditure Loan shall be made by
Foothill at such times and in such amounts as Borrower may request in writing,
shall be advanced directly to the applicable vendor or Borrower, as the case may
be, and once borrowed may be prepaid in whole or in part without penalty or
premium at any time during the term of this Agreement upon 30 days prior written
notice by Borrower to Foothill, all such prepaid amounts to be applied to the
installments due on all of the Capital Expenditure Loans in the inverse order of
their maturity. The foregoing to the contrary notwithstanding, (a) each
requested Capital Expenditure Loan shall be in a principal amount of not less
than (i) $200,000, or (ii) such lesser amount as is the then unfunded balance of
the Capital Expenditure Line, (b) each Capital Expenditure Loan shall be in an
amount, as determined by Foothill, not to exceed 80% of Borrower's invoice cost
(net of shipping, freight, installation, and other so-called "soft costs") of
(i) new Equipment that is to be purchased by Borrower with the proceeds of such
Capital Expenditure Loan, or (ii) new Equipment that has been purchased by
Borrower within 30 days prior to the date of the making of such Capital
Expenditure Loan, (c) the new Equipment that is to be acquired or that has been
purchased by Borrower must be acceptable to Foothill in all respects, not be a
fixture, and not be intended to be affixed to real property or to become
installed in or affixed to other goods, (d)
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Foothill shall in no event have any obligation to make any Capital Expenditure
Loan hereunder to the extent that the making thereof would cause the then
outstanding amount of Capital Expenditure Loans to exceed the Maximum Capital
Expenditure Line as set forth in this Section 2.3 and (e) the aggregate amount
of all Capital Expenditure Loans outstanding at any time (including giving
effect to any requested Capital Expenditure Loan) shall not exceed the lesser of
cost or fair market value, of all of the Equipment acquired or financed with the
proceeds of such Capital Expenditure Loans. All amounts outstanding under the
Capital Expenditure Loans shall constitute Obligations.
2.4. OVERADVANCES. If, at any time or for any reason, the amount
of Obligations owed by Borrower to Foothill pursuant to Sections 2.1, and 2.3 is
greater than either the Dollar or percentage limitations set forth in Sections
2.1, or 2.3 (an "Overadvance"), Borrower immediately shall pay to Foothill, in
cash, the amount of such excess to be used by Foothill first, to repay Advances
outstanding under Section 2.1 and, thereafter, to be used by Foothill to repay
Capital Expenditure Loans outstanding under Section 2.3.
2.5. INTEREST: RATES, PAYMENTS, AND CALCULATIONS.
(a) Interest Rate. All Obligations (including, without
limitation, all Advances, Capital Expenditure Loans and the Term Loan) shall
bear interest on the Daily Balance thereof at a per annum rate equal to the
Reference Rate plus the applicable Interest Margin, each as in effect from time
to time.
(b) Default Rate. Upon the occurrence and during the
continuation of an Event of Default, all Obligations (including, without
limitation, all Advances, Capital Expenditure Loans and the Term Loan) shall
bear interest at a per annum rate equal to three percentage points (3.00%) above
the Reference Rate.
(c) Minimum Funding. In no event shall the rate of
interest chargeable hereunder for any day be less than the amount of interest
that would be charged on Obligations of $3,500,000 outstanding on such day. To
the extent that interest accrued hereunder at the rate set forth herein would be
less than the foregoing minimum, the interest chargeable hereunder for such day
automatically shall be deemed increased to the foregoing minimum. To the extent
that interest accrued hereunder at the rate set forth herein would yield less
than the foregoing minimum amount, the interest rate chargeable hereunder for
the period in question automatically shall be deemed increased to that rate that
would result in the minimum amount of interest being accrued and payable
hereunder.
(d) Payments. Interest payable hereunder shall be due
and payable, in arrears, on the first day of each month during the term hereof.
Borrower hereby authorizes Foothill, at its option, without prior notice to
Borrower, to charge such interest, all Foothill Expenses (as and when incurred),
the fees and charges provided for in Section 2.10 (as and when accrued or
incurred), and all installments or other payments due under the Term Loan, the
Capital Expenditure Loans, or any Loan Document to Borrower's Loan Account,
which amounts thereafter shall accrue interest at the rate then applicable to
Advances hereunder. Any interest
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not paid when due shall be compounded and shall thereafter accrue interest at
the rate then applicable to Advances hereunder.
(e) Computation. The Reference Rate as of the date of
this Agreement is 8.25% per annum. In the event the Reference Rate is changed
from time to time hereafter, the applicable rate of interest hereunder
automatically and immediately shall be increased or decreased by an amount equal
to such change in the Reference Rate. All interest and fees chargeable under the
Loan Documents shall be computed on the basis of a 360 day year for the actual
number of days elapsed.
(f) Intent to Limit Charges to Maximum Lawful Rate. In
no event shall the interest rate or rates payable under this Agreement, plus any
other amounts paid in connection herewith, exceed the highest rate permissible
under any law that a court of competent jurisdiction shall, in a final
determination, deem applicable. Borrower and Foothill, in executing and
delivering this Agreement, intend legally to agree upon the rate or rates of
interest and manner of payment stated within it; provided, however, that,
anything contained herein to the contrary notwithstanding, if said rate or rates
of interest or manner of payment exceeds the maximum allowable under applicable
law, then, ipso facto as of the date of this Agreement, Borrower is and shall be
liable only for the payment of such maximum as allowed by law, and payment
received from Borrower in excess of such legal maximum, whenever received, shall
be applied to reduce the principal balance of the Obligations to the extent of
such excess.
2.6. COLLECTION OF ACCOUNTS. Borrower shall at all times
maintain lockboxes (the "Lockboxes") and, immediately after the Closing Date,
shall instruct all Account Debtors with respect to the Accounts, General
Intangibles, Negotiable Collateral and Investment Property of Borrower to remit
all Collections in respect thereof to such Lockboxes. Borrower, Foothill, and
the Lockbox Banks shall enter into the Lockbox Agreements, which among other
things shall provide for the opening of a Lockbox Account for the deposit of
Collections at a Lockbox Bank. Borrower agrees that all Collections and other
amounts received by Borrower from any Account Debtor or any other source
immediately upon receipt shall be deposited into a Lockbox Account. No Lockbox
Agreement or arrangement contemplated thereby shall be modified by Borrower
without the prior written consent of Foothill. Upon the terms and subject to the
conditions set forth in the Lockbox Agreements, all amounts received in each
Lockbox Account shall be wired each Business Day into an account (the "Foothill
Account") maintained by Foothill at a depositary selected by Foothill.
2.7. CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt
of any Collections by Foothill (whether from transfers to Foothill by the
Lockbox Banks pursuant to the Lockbox Agreements or otherwise) immediately shall
be applied provisionally to reduce the Obligations outstanding under Section
2.1, but shall not be considered a payment on account unless such Collection
item is a wire transfer of immediately available federal funds and is made to
the Foothill Account or unless and until such Collection item is honored when
presented for payment. From and after the Closing Date, Foothill shall be
entitled to charge Borrower for two (2) Business Days of `clearance' or `float'
at the rate set forth in Section 2.5(a) or Section 2.5(b), as applicable, on all
Collections that are received by Foothill (regardless of whether forwarded by
the Lockbox Banks to Foothill, whether provisionally applied to reduce the
Obligations under
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Section 2.1, or otherwise). This across-the-board two (2) Business Day clearance
or float charge on all Collections is acknowledged by the parties to constitute
an integral aspect of the pricing of Foothill's financing of Borrower, and shall
apply irrespective of the characterization of whether receipts are owned by
Borrower or Foothill, and whether or not there are any outstanding Advances, the
effect of such clearance or float charge being the equivalent of charging two
(2) Business Days of interest on such Collections. Should any Collection item
not be honored when presented for payment, then Borrower shall be deemed not to
have made such payment, and interest shall be recalculated accordingly. Anything
to the contrary contained herein notwithstanding, any Collection item shall be
deemed received by Foothill only if it is received into the Foothill Account on
a Business Day on or before 11:00 a.m. California time. If any Collection item
is received into the Foothill Account on a non-Business Day or after 11:00 a.m.
California time on a Business Day, it shall be deemed to have been received by
Foothill as of the opening of business on the immediately following Business
Day.
2.8. DESIGNATED ACCOUNT. Foothill is authorized to make the
Advances, the Term Loan, and the Capital Expenditure Loans under this Agreement
based upon telephonic or other instructions received from anyone purporting to
be an Authorized Person, or without instructions if pursuant to Section 2.5(d).
Borrower agrees to establish and maintain the Designated Account with the
Designated Account Bank for the purpose of receiving the proceeds of the
Advances and the Capital Expenditure Loans requested by Borrower and made by
Foothill hereunder. Unless otherwise agreed by Foothill and Borrower, any
Advance and the Capital Expenditure Loans requested by Borrower and made by
Foothill hereunder shall be made to the Designated Account.
2.9. MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS.
Foothill shall maintain an account on its books in the name of Borrower (the
"Loan Account") on which Borrower will be charged with all Advances, the Term
Loan, and all Capital Expenditure Loans made by Foothill to Borrower or for
Borrower's account, including, accrued interest, Foothill Expenses, and any
other payment Obligations of Borrower. In accordance with Section 2.7, the Loan
Account will be credited with all payments received by Foothill from Borrower or
for Borrower's account, including all amounts received in the Foothill Account
from any Lockbox Bank. Foothill shall render statements regarding the Loan
Account to Borrower, including principal, interest, fees, and including an
itemization of all charges and expenses constituting Foothill Expenses owing,
and such statements shall be conclusively presumed to be correct and accurate
and constitute an account stated between Borrower and Foothill unless, within 30
days after receipt thereof by Borrower, Borrower shall deliver to Foothill
written objection thereto describing the error or errors contained in any such
statements.
2.10. FEES. Borrower shall pay to Foothill the following fees:
(a) Closing Fee. On the Closing Date, a closing fee of
$100,000;
(b) Unused Line Fee. On the first day of each month
during the term of this Agreement, an unused line fee in an amount equal to
0.50% per annum times the Average Unused Portion of the Maximum Revolving Amount
payable in arrears.
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(c) Annual Facility Fee. On each anniversary of the
Closing Date, an annual facility fee in an amount equal to 0.25% of the Maximum
Revolving Amount;
(d) Financial Examination, Documentation, and Appraisal
Fees. Foothill's customary fee of $750 per day per examiner, plus Foothill's
one-time electronic reporting set-up fee in the amount of $3,000 and Foothill's
out-of-pocket expenses for such electronic reporting setup and each financial
analysis and examination (i.e., audits) of Borrower performed by personnel
employed by Foothill; Foothill's customary appraisal fee of $1,500 per day per
appraiser, plus out-of-pocket expenses for each appraisal of the Collateral
performed by personnel employed by Foothill; and, the actual charges paid or
incurred by Foothill if it elects to employ the services of one or more third
Persons to perform such financial analyses and examinations (i.e., audits) of
Borrower or to appraise the Collateral; and, on each anniversary of the Closing
Date, Foothill's customary fee of $1,000 per year for its loan documentation
review; provided, however, that unless a Default or an Event of Default shall
have occurred and be in existence, Borrower shall be obligated to pay Foothill
for not more than four (4) audits per calendar year and one (1) appraisal per
calendar year; and
(e) Servicing Fee. On the first day of each month during
the term of this Agreement, and thereafter so long as any Obligations are
outstanding, a servicing fee in an amount equal to $2,000.
3. CONDITIONS; TERM OF AGREEMENT.
3.1. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE, THE TERM LOAN,
AND THE INITIAL CAPITAL EXPENDITURE LOAN. The obligation of Foothill to make the
initial Advance, to make the Term Loan, or to make the initial Capital
Expenditure Loan is subject to the fulfillment, to the satisfaction of Foothill
and its counsel, of each of the following conditions on or before the Closing
Date:
(a) the Closing Date shall occur on or before September
30, 1999;
(b) Foothill shall have received searches reflecting the
filing of its financing statements and fixture filings;
(c) Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
a. the Lockbox Agreements;
b. the Disbursement Letter;
c. the Pay-Off Letter, together with UCC
termination statements and other documentation
evidencing the termination by Existing Lender of its
Liens in and to the properties and assets of
Borrower;
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d. evidence acceptable to Foothill indicating
that Undrawn Availability will be at least $500,000
after giving effect to the Term Loan, all Capital
Expenditure Loans to be made on the Closing Date and
all Advances to be made on the Closing Date;
e. the agreements, instruments and other
documents referred to in Schedule 3.1 hereof;
(d) Foothill shall have received a certificate from the
Secretary of Borrower attesting to the resolutions of Borrower's Board of
Directors authorizing its execution, delivery, and performance of this Agreement
and the other Loan Documents to which Borrower is a party and authorizing
specific officers of Borrower to execute the same;
(e) Foothill shall have received copies of Borrower's
Governing Documents, as amended, modified, or supplemented to the Closing Date,
certified by the Secretary of Borrower;
(f) Foothill shall have received a certificate of status
with respect to Borrower, dated within 10 days of the Closing Date, such
certificate to be issued by the appropriate officer of the jurisdiction of
organization of Borrower, which certificate shall indicate that Borrower is in
good standing in such jurisdiction;
(g) Foothill shall have received certificates of status
with respect to Borrower, each dated within 15 days of the Closing Date, such
certificates to be issued by the appropriate officer of the jurisdictions in
which its failure to be duly qualified or licensed would constitute a Material
Adverse Change, which certificates shall indicate that Borrower is in good
standing in such jurisdictions;
(h) Foothill shall have received a certificate of
insurance, together with the endorsements thereto, as are required by Section
6.10, the form and substance of which shall be satisfactory to Foothill and its
counsel;
(i) Foothill shall have received duly executed
certificates of title with respect to that portion of the Collateral that is
subject to certificates of title;
(j) Foothill shall have received such Collateral Access
Agreements from lessors, warehousemen, bailees, and other third persons as
Foothill may require;
(k) Foothill shall have received an opinion of
Borrower's counsel in form and substance satisfactory to Foothill in its sole
discretion;
(l) Foothill shall have received appraisals of the
Equipment, satisfactory to Foothill;
(m) Foothill shall have received satisfactory evidence
that all tax returns required to be filed by Borrower have been timely filed and
all taxes upon Borrower or
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its properties, assets, income, and franchises (including real property taxes
and payroll taxes) have been paid prior to delinquency, except such taxes that
are the subject of a Permitted Protest;
(n) all other documents and legal matters in connection
with the transactions contemplated by this Agreement shall have been delivered,
executed, or recorded and shall be in form and substance satisfactory to
Foothill and its counsel; and
(o) Foothill shall have received satisfactory background
checks with respect to the officers, employees and shareholders of Borrower
issued by such organization or organizations as may be acceptable to Foothill.
3.2. CONDITIONS PRECEDENT TO ALL ADVANCES, THE TERM LOAN, AND
ALL CAPITAL EXPENDITURE LOANS. The following shall be conditions precedent to
all Advances, the Term Loan, and all Capital Expenditure Loans hereunder:
(a) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all respects
on and as of the date of such extension of credit, as though made on and as of
such date (except to the extent that such representations and warranties
relate solely to an earlier date);
(b) no Default or Event of Default shall have occurred
and be continuing on the date of such extension of credit, nor shall either
result from the making thereof;
(c) no Material Adverse Change shall have occurred
subsequent to August 31, 1999; and
(d) no injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the extending of such
credit shall have been issued and remain in force by any governmental authority
against Borrower, Foothill, or any of their Affiliates.
3.3. CONDITION SUBSEQUENT As a condition subsequent to initial
closing hereunder, Borrower shall perform or cause to be performed the following
(the failure by Borrower to so perform or cause to be performed constituting an
Event of Default):
(a) within 30 days of the Closing Date, deliver to
Foothill the certified copies of the policies of insurance, together with the
endorsements thereto, as are required by Section 6.10, the form and substance of
which shall be satisfactory to Foothill and its counsel;
(b) by November 15, 1999, deliver to Foothill the
financial statements of the Borrower with respect to fiscal years 1996, 1997 and
1998, audited by D&T and certified, without qualification, by such accountants
to have been prepared in accordance with GAAP and otherwise complying with the
requirements of Section 6.3(b) and not, in Foothill's reasonable judgment,
varying substantially from the restated financial statements for the fiscal
years 1996, 1997 and 1998 as delivered to Foothill on or before the Closing Date
(other than certain
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additional Inventory writedowns that may be proposed by the Borrower and have
been approved by D&T);
(c) (x) by December 15, 1999, deliver to Foothill the
financial statements (including, without limitation, balance sheet and income
statement) of the Borrower for the fiscal quarters of the Borrower ended March
31, 1999 and June 30, 1999, each reviewed by Deloitte & Touche or other
nationally recognized certified public accountants and not, in Foothill's
reasonable judgment, varying substantially from the restated financial
statements for the fiscal quarters ended March 31, 1999 and June 30, 1999 as
delivered to Foothill on or before the Closing Date, and (y) by December 31,
1999, deliver to Foothill the financial statements of the Borrower with respect
to the fiscal quarter ended September, 1999, in each of the foregoing cases
reviewed by D&T and prepared in accordance with GAAP and otherwise complying
with the requirements of Section 6.3(a);
(d) Maintain a standard and modern system of accounting
that enables Borrower to produce financial statements in accordance with GAAP,
and maintain records pertaining to the Collateral that contain information as
from time to time may be reasonably requested by Foothill. Borrower also shall
keep a modern inventory reporting system that shows all additions, sales,
claims, returns, and allowances with respect to the Inventory and shall, by no
later than November 15, 1999, upgrade its existing inventory reporting system
pursuant to the specifications set forth on Schedule 1.1-S; and
(e) In the event that one or more Collateral Access
Agreements from lessors of real property have not been received by Foothill as
required under Section 3.1(k) on or before Closing Date, Foothill may, in its
sole discretion (and without in any manner affecting any other rights it may
have under this Agreement), institute a reserve against the Borrowing Base in an
amount equal to up to one month's rent (and, on and after the date that is
thirty (30) days after the Closing Date, up to three (3) month's rent) plus past
due rent with respect to the subject leased real properties. The foregoing
reserve would be released upon receipt by Foothill of Collateral Access
Agreements satisfactory to Foothill with respect to such leased real properties.
3.4. TERM; AUTOMATIC RENEWAL. This Agreement shall become
effective upon the execution and delivery hereof by Borrower and Foothill and
shall continue in full force and effect for a term ending on the date (the
"Renewal Date") that is five (5) years from the Closing Date and automatically
shall be renewed for successive one (1) year periods thereafter, unless sooner
terminated pursuant to the terms hereof. Either party may terminate this
Agreement effective on the Renewal Date or on any one (1) year anniversary of
the Renewal Date by giving the other party at least 90 days prior written
notice. The foregoing notwithstanding, Foothill shall have the right to
terminate its obligations under this Agreement immediately and without notice
upon the occurrence and during the continuation of an Event of Default.
3.5. EFFECT OF TERMINATION. On the date of termination of this
Agreement, all Obligations immediately shall become due and payable without
notice or demand. No termination of this Agreement, however, shall relieve or
discharge Borrower of Borrower's
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duties, Obligations, or covenants hereunder, and Foothill's continuing security
interests in the Collateral shall remain in effect until all Obligations have
been fully and finally discharged and Foothill's obligation to provide
additional credit hereunder is terminated. If Borrower has sent a notice of
termination pursuant to the provisions of Section 3.4, but fails to pay the
Obligations in full on the date set forth in said notice, then Foothill may, but
shall not be required to, renew this Agreement for an additional term of one (1)
year.
3.6. EARLY TERMINATION BY BORROWER. The provisions of Section
3.4 that allow termination of this Agreement by Borrower only on the Renewal
Date and certain anniversaries thereof notwithstanding, Borrower has the option,
at any time upon 90 days prior written notice to Foothill, to terminate this
Agreement by paying to Foothill, in cash, with a premium (the "Early Termination
Premium") equal to one percent (1.00%) of the Maximum Revolving Amount if such
termination occurs at any time other than on the Renewal Date or any one year
anniversary of the Renewal Date. The Early Termination Premium shall be (x)
waived in full in the event that the termination of this Agreement and the
repayment in full in cash of all Obligations is funded through a refinancing
provided by Wells Fargo Bank or any Subsidiary thereof and (y) reduced by fifty
percent (50%) in the event that the termination of this Agreement and the
repayment in full in cash of all Obligations is funded through the arm's length
sale of the Borrower to a Person who is not an Affiliate of the Borrower.
3.7. TERMINATION UPON EVENT OF DEFAULT . If Foothill terminates
this Agreement upon the occurrence of an Event of Default, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Foothill's
lost profits as a result thereof, Borrower shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal to the Early
Termination Premium. The Early Termination Premium shall be presumed to be the
amount of damages sustained by Foothill as the result of the early termination
and Borrower agrees that it is reasonable under the circumstances currently
existing. The Early Termination Premium provided for in this Section 3.7 shall
be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
4.1. GRANT OF SECURITY INTEREST Borrower hereby grants to
Foothill a continuing security interest in all currently existing and hereafter
acquired or arising Personal Property Collateral in order to secure prompt
repayment of any and all Obligations and in order to secure prompt performance
by Borrower of each of its covenants and duties under the Loan Documents.
Foothill's security interests in the Personal Property Collateral shall attach
to all Personal Property Collateral without further act on the part of Foothill
or Borrower.
4.2. NEGOTIABLE COLLATERAL; INVESTMENT PROPERTY. In the event
that any Collateral, including proceeds, is evidenced by or consists of
Negotiable Collateral or Investment Property, Borrower, immediately upon the
request of Foothill, shall endorse and deliver physical possession of such
Negotiable Collateral or Investment Property, as the case may be, to Foothill.
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4.3. COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, NEGOTIABLE
COLLATERAL AND INVESTMENT PROPERTY. At any time following and during the
continuance of an Event of Default, Foothill or Foothill's designee may (a)
notify customers or Account Debtors of Borrower that the Accounts, General
Intangibles, Negotiable Collateral or Investment Property have been assigned to
Foothill or that Foothill has a security interest therein, and (b) collect the
Accounts, General Intangibles, Negotiable Collateral and Investment Property
directly and charge the collection costs and expenses to the Loan Account.
Borrower agrees that it will hold in trust for Foothill, as Foothill's trustee,
any Collections that it receives and immediately will deliver said Collections
to Foothill in their original form as received by Borrower.
4.4. DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time
upon the request of Foothill, Borrower shall execute and deliver to Foothill all
financing statements, continuation financing statements, fixture filings,
security agreements, pledges, assignments, endorsements of certificates of
title, applications for title, affidavits, reports, notices, schedules of
accounts, letters of authority, and all other documents that Foothill reasonably
may request, in form reasonably satisfactory to Foothill, to perfect and
continue perfected Foothill's security interests in the Collateral, and in order
to fully consummate all of the transactions contemplated hereby and under the
other Loan Documents.
4.5. POWER OF ATTORNEY. Borrower hereby irrevocably makes,
constitutes, and appoints Foothill (and any of Foothill's officers, employees,
or agents designated by Foothill) as Borrower's true and lawful attorney, with
power to (a) if Borrower refuses to, or fails timely to execute and deliver any
of the documents described in Section 4.4, sign the name of Borrower on any of
the documents described in Section 4.4, (b) at any time that an Event of Default
has occurred and is continuing, sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against Account Debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to Account
Debtors, (c) send requests for verification of Accounts, (d) endorse Borrower's
name on any Collection item that may come into Foothill's possession, (e) at any
time that an Event of Default has occurred and is continuing, notify the post
office authorities to change the address for delivery of Borrower's mail to an
address designated by Foothill, to receive and open all mail addressed to
Borrower, and to retain all mail relating to the Collateral and forward all
other mail to Borrower, (f) at any time that an Event of Default has occurred
and is continuing, make, settle, and adjust all claims under Borrower's policies
of insurance and make all determinations and decisions with respect to such
policies of insurance, and (g) at any time that an Event of Default has occurred
and is continuing, settle and adjust disputes and claims respecting the Accounts
directly with Account Debtors, for amounts and upon terms that Foothill
determines to be reasonable, and Foothill may cause to be executed and delivered
any documents and releases that Foothill determines to be necessary. The
appointment of Foothill as Borrower's attorney, and each and every one of
Foothill's rights and powers, being coupled with an interest, is irrevocable
until all of the Obligations have been fully and finally repaid and performed
and Foothill's obligation to extend credit hereunder is terminated.
4.6. RIGHT TO INSPECT. Foothill (through any of its officers,
employees, or agents) shall have the right, from time to time hereafter to
inspect Borrower's Books and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, quality, value,
condition of, or any other matter relating to, the Collateral.
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5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this Agreement, Borrower
makes the following representations and warranties which shall be true, correct,
and complete in all respects as of the date hereof, and shall be true, correct,
and complete in all respects as of the Closing Date, and at and as of the date
of the making of each Advance, Term Loan, or Capital Expenditure Loan made
thereafter, as though made on and as of the date of such Advance, Term Loan, or
Capital Expenditure Loan (except to the extent that such representations and
warranties relate solely to an earlier date) and such representations and
warranties shall survive the execution and delivery of this Agreement:
5.1. NO ENCUMBRANCES. Borrower has good and indefeasible title
to the Collateral, free and clear of Liens except for Permitted Liens.
5.2. ELIGIBLE ACCOUNTS The Eligible Accounts are bona fide
existing obligations created by the sale and delivery of Inventory or the
rendition of services to Account Debtors in the ordinary course of Borrower's
business, unconditionally owed to Borrower without defenses, disputes, offsets,
counterclaims, or rights of return or cancellation. The property giving rise to
such Eligible Accounts has been delivered to the Account Debtor, or to the
Account Debtor's agent for immediate shipment to and unconditional acceptance by
the Account Debtor. Borrower has not received notice of actual or imminent
bankruptcy, insolvency, or material impairment of the financial condition of any
Account Debtor regarding any Eligible Account.
5.3. ELIGIBLE INVENTORY [INTENTIONALLY OMITTED.]
5.4. EQUIPMENT. All of the Equip-ment is used or held for use in
Borrower's busi-ness and is fit for such purposes.
5.5. LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and
Equipment are not stored with a bailee, warehouseman, or similar party (without
Foothill's prior written consent) and are located only at the locations
identified on Schedule 6.12 or otherwise permitted by Section 6.12.
5.6. INVENTORY RECORDS. Borrower keeps correct and accurate
records itemizing and describing the kind, type, quality, and quantity of the
Inventory, and Borrower's cost therefor.
5.7. LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief
executive office of Borrower is located at the address indicated in the preamble
to this Agreement and Borrower's FEIN is 13-3317668.
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5.8. DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Borrower is duly organized and existing and in good
standing under the laws of the jurisdiction of its incorporation and qualified
and licensed to do business in, and in good standing in, any state where the
failure to be so licensed or qualified reasonably could be expected to have a
Material Adverse Change.
(b) Set forth on Schedule 5.8, is a complete and
accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the
jurisdiction of their incorporation; (ii) the number of shares of each class of
common and preferred stock authorized for each of such Subsidiaries; and (iii)
the number and the percentage of the outstanding shares of each such class owned
directly or indirectly by Borrower. All of the outstanding capital stock of each
such Subsidiary has been validly issued and is fully paid and non-assessable.
(c) Except as set forth on Schedule 5.8, no capital
stock (or any securities, instruments, warrants, options, purchase rights,
conversion or exchange rights, calls, commitments or claims of any character
convertible into or exercisable for capital stock) of any direct or indirect
Subsidiary of Borrower is subject to the issuance of any security, instrument,
warrant, option, purchase right, conversion or exchange right, call, commitment
or claim of any right, title, or interest therein or thereto.
5.9. DUE AUTHORIZATION; NO CONFLICT.
(a) The execution, delivery, and performance by Borrower
of this Agreement and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
(b) The execution, delivery, and performance by Borrower
of this Agreement and the Loan Documents to which it is a party do not and will
not (i) violate any provision of federal, state, or local law or regulation
(including Regulations G, T, U, and X of the Federal Reserve Board) applicable
to Borrower, the Governing Documents of Borrower, or any order, judgment, or
decree of any court or other Governmental Authority binding on Borrower, (ii)
conflict with, result in a breach of, or constitute (with due notice or lapse of
time or both) a default under any material contractual obligation or material
lease of Borrower, (iii) result in or require the creation or imposition of any
Lien of any nature whatsoever upon any properties or assets of Borrower, other
than Permitted Liens, or (iv) require any approval of stockholders or any
approval or consent of any Person under any material contractual obligation of
Borrower.
(c) Other than the filing of appropriate financing
statements, fixture filings, filings with the U.S. Patent & Trademark Office,
and mortgages, the execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which Borrower is a party do not and will
not require any registration with, consent, or approval of, or notice to, or
other action with or by, any federal, state, foreign, or other Governmental
Authority or other Person.
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(d) This Agreement and the Loan Documents to which
Borrower is a party, and all other documents contemplated hereby and thereby,
when executed and delivered by Borrower will be the legally valid and binding
obligations of Borrower, enforceable against Borrower in accordance with their
respective terms, except as enforcement may be limited by equitable principles
or by bankruptcy, insolvency, reorganization, moratorium, or similar laws
relating to or limiting creditors' rights generally.
(e) The Liens granted by Borrower to Foothill in and to
its properties and assets pursuant to this Agreement and the other Loan
Documents are validly created, perfected, and first priority Liens, subject only
to Permitted Liens.
5.10. LITIGATION. There are no actions or proceedings pending by
or against Borrower before any court or administrative agency and Borrower does
not have knowledge or belief of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions, or prosecutions
involving Borrower or any guarantor of the Obligations, except for: (a) ongoing
collection matters in which Borrower is the plaintiff; (b) matters disclosed on
Schedule 5.10; and (c) matters arising after the date hereof that would not
reasonably be expected to cause a Material Adverse Change.
5.11. NO MATERIAL ADVERSE CHANGE. All financial statements
relating to Borrower or any guarantor of the Obligations that have been
delivered by Borrower to Foothill have been prepared in accordance with GAAP
(except, in the case of unaudited financial statements, for the lack of
footnotes and being subject to year-end audit adjustments) and fairly present
Borrower's (or such guarantor's, as applicable) financial condition as of the
date thereof and Borrower's results of operations for the period then ended.
There has not been a Material Adverse Change with respect to Borrower (or such
guarantor, as applicable) since the date of the latest financial statements
submitted to Foothill on or before the Closing Date.
5.12. SOLVENCY. Borrower is Solvent. No transfer of property is
being made by Borrower and no obligation is being incurred by Borrower in
connection with the transactions contemplated by this Agreement or the other
Loan Documents with the intent to hinder, delay, or defraud either present or
future creditors of Borrower.
5.13. EMPLOYEE BENEFITS. None of Borrower, any of its
Subsidiaries, or any ERISA Affiliates maintain or contribute to any Plan, other
than those listed on Schedule 5.13, that could reasonably be expected to result
in a Material Adverse Change. Borrower, each of its Subsidiaries and each ERISA
Affiliate have satisfied the minimum funding standards of ERISA and the IRC with
respect to each Benefit Plan to which it is obligated to contribute. No ERISA
Event has occurred that reasonably could be expected to result in a Material
Adverse Change nor has any other event occurred that may result in an ERISA
Event that reasonably could be expected to result in a Material Adverse Change.
None of Borrower or its Subsidiaries, any ERISA Affiliate, or any fiduciary of
any Plan is subject to any direct or indirect liability with respect to any Plan
under any applicable law, treaty, rule, regulation, or agreement that reasonably
could be expected to result in a Material Adverse Change. None of Borrower or
its Subsidiaries or any ERISA Affiliate is required to provide security to any
Plan under Section 401(a)(29) of the IRC. Borrower shall furnish Foothill with
written notice within thirty days of
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the event of any increase in the benefits of any Benefit Plan or Multiemployer
Plan that could reasonably be expected to result in a Material Adverse Change,
or the establishment of any new Benefit Plan or the commencement of
contributions to any Benefit Plan or Multiemployer Plan to which either Borrower
or any of its Subsidiaries or an ERISA Affiliate was not previously
contributing.
5.14. ENVIRONMENTAL CONDITION. None of Borrower's properties or
assets has ever been used by Borrower or, to the best of Borrower's knowledge,
by previous owners or operators in the disposal of, or to produce, store,
handle, treat, release, or transport, any Hazardous Materials in violation of
applicable law or regulation. None of Borrower's properties or assets has ever
been designated or identified in any manner pursuant to any environmental
protection statute as a Hazardous Materials disposal site, or a candidate for
closure pursuant to any environmental protection statute. No Lien arising under
any environmental protection statute has attached to any revenues or to any real
or personal property owned or operated by Borrower. Borrower has not received a
summons, citation, notice, or directive from the Environmental Protection Agency
or any other federal or state governmental agency concerning any action or
omission by Borrower resulting in the releasing or disposing of Hazardous
Materials into the environment.
5.15. YEAR 2000. Borrower and its Subsidiaries have reviewed the
areas within their business and operations which could be adversely affected by,
and have developed or are developing a program to address fully on a timely
basis (but in any event by no later than October 31, 1999), the risk that
certain computer applications used by Borrower or its Subsidiaries (or any of
their respective material suppliers, customers or vendors) may be unable to
recognize and perform properly date sensitive functions involving dates prior to
and after December 31, 1999 (the "Year 2000 Problem"). The Year 2000 Problem
will not result in a Material Adverse Change. At the request of Foothill from
time to time, the Borrower shall provide Foothill with interim status reports
with respect to its response to the Year 2000 Problem, and such status reports
shall be in form and substance satisfactory to Foothill.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, Borrower shall do all of the following:
6.1. AMENDMENTS TO QUALIFIED PRODUCTION CONTRACTS. Promptly
provide Foothill with copies of all amendments, modifications or supplements to
all Qualified Production Contracts.
6.2. COLLATERAL REPORTING. Provide Foothill with the following
documents at the following times in form satisfactory to Foothill: (a) on each
Business Day, a sales journal, collection journal, and credit register since the
last such schedule and a calculation of the Borrowing Base (with respect to
Accounts) as of such date, (b) on a monthly basis and, in any event, by no later
than the 15th day of each month during the term of this Agreement, (i) a
detailed calculation of the Borrowing Base, and (ii) a detailed aging, by total,
of the Accounts,
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together with a reconciliation to the detailed calculation of the Borrowing Base
previously provided to Foothill, (c) on a monthly basis and, in any event, by no
later than the 15th day of each month during the term of this Agreement, a
summary aging, by vendor, of Borrower's accounts payable and any book overdraft,
(d) with respect to the months of September and October on a monthly basis (with
a roll-forward on a weekly basis), and thereafter, on a weekly basis, Inventory
reports specifying Borrower's cost and the wholesale market value of its
Inventory by category, with additional detail showing additions to and deletions
from the Inventory, (e) on each Business Day, notice of all returns, disputes,
or claims, (f) upon request, copies of invoices in connection with the Accounts,
customer statements, credit memos, remittance advices and reports, deposit
slips, shipping and delivery documents in connection with the Accounts and for
Inventory and Equipment acquired by Borrower, purchase orders and invoices, (g)
on a quarterly basis, a detailed list of Borrower's customers, (h) on a monthly
basis, a calculation of the Dilution for the prior month; and (i) such other
reports as to the Collateral or the financial condition of Borrower as Foothill
may reasonably request from time to time. Original sales invoices evidencing
daily sales shall be mailed by Borrower to each Account Debtor and, at
Foothill's direction following and during the continuance of an Event of
Default, the invoices shall indicate on their face that the Account has been
assigned to Foothill and that all payments are to be made directly to Foothill.
At Foothill's request, Borrower shall grant Foothill full and unlimited access
to all of Borrower's Books (including, without limitation, computer programs,
desk or tape files, printouts, runs or other computer prepared information)
relating to any of the foregoing.
6.3. FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to
Foothill: (a) as soon as available, but in any event within 45 days after the
end of each month during each of Borrower's fiscal years, a company prepared
balance sheet, income statement, and statement of cash flow covering Borrower's
operations during such period (and during the period commencing on the start of
the current fiscal year and ending with such period); and (b) as soon as
available, but in any event within 90 days after the end of each of Borrower's
fiscal years, financial statements of Borrower for each such fiscal year,
audited by independent certified public accountants reasonably acceptable to
Foothill and certified, without any qualifications, by such accountants to have
been prepared in accordance with GAAP, together with a certificate of such
accountants addressed to Foothill stating that such accountants do not have
knowledge of the existence of any Default or Event of Default. Such audited
financial statements shall include a balance sheet, profit and loss statement,
and statement of cash flow and, if prepared, such accountants' letter to
management. If Borrower is a parent company of one or more Subsidiaries, or
Affiliates, or is a Subsidiary or Affiliate of another company, then, in
addition to the financial statements referred to above, Borrower agrees to
deliver financial statements prepared on a consolidating basis so as to present
Borrower and each such related entity separately, and on a consolidated basis.
Together with the above, Borrower also shall deliver to
Foothill Borrower's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and
Form 8-K Current Reports, and any other filings made by Borrower with the
Securities and Exchange Commission, if any, as soon as the same are filed, or
any other information that is provided by Borrower to its shareholders, and any
other report reasonably requested by Foothill relating to the financial
condition of Borrower.
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Each month, together with the financial statements provided
pursuant to Section 6.3(a), Borrower shall deliver to Foothill a certificate
signed by its chief financial officer to the effect that: (i) all financial
statements delivered or caused to be delivered to Foothill hereunder have been
prepared in accordance with GAAP (except, in the case of unaudited financial
statements, for the lack of footnotes and being subject to year-end audit
adjustments) and fairly present the financial condition of Borrower, (ii) the
representations and warranties of Borrower contained in this Agreement and the
other Loan Documents are true and correct in all material respects on and as of
the date of such certificate, as though made on and as of such date (except to
the extent that such representations and warranties relate solely to an
earlier date), (iii) for each month that also is the date on which a financial
covenant in Section 7.20 is to be tested, a compliance certificate demonstrating
in reasonable detail compliance at the end of such period with the applicable
financial covenant(s) contained in Section 7.20, and (iv) on the date of
delivery of such certificate to Foothill there does not exist any condition or
event that constitutes a Default or Event of Default (or, in the case of clauses
(i), (ii), or (iii), to the extent of any non-compliance, describing such
non-compliance as to which he or she may have knowledge and what action Borrower
has taken, is taking, or proposes to take with respect thereto).
Borrower shall have issued written instructions to its
independent certified public accountants authorizing them to communicate with
Foothill and to release to Foothill whatever financial information concerning
Borrower that Foothill may request. Borrower hereby irrevocably authorizes and
directs all auditors, accountants, or other third parties to deliver to
Foothill, at Borrower's expense, copies of Borrower's financial statements,
papers related thereto, and other accounting records of any nature in their
possession, and to disclose to Foothill any information they may have regarding
Borrower's business affairs and financial conditions.
6.4. TAX RETURNS. Deliver to Foothill copies of each of
Borrower's future federal income tax returns, and any amendments thereto, within
30 days of the filing thereof with the Internal Revenue Service.
6.5. GUARANTOR REPORTS. Cause any guarantor of any of the
Obligations to deliver its annual financial statements at the time when Borrower
provides its audited financial statements to Foothill and copies of all federal
income tax returns as soon as the same are available and in any event no later
than 30 days after the same are required to be filed by law.
6.6. RETURNS. Cause returns and allowances, if any, as between
Borrower and its Account Debtors to be on the same basis and in accordance with
the usual customary practices of Borrower, as they exist at the time of the
execution and delivery of this Agreement. If, at a time when no Event of Default
has occurred and is continuing, any Account Debtor returns any Inventory to
Borrower, Borrower promptly shall determine the reason for such return and, if
Borrower accepts such return, issue a credit memorandum (with a copy to be sent
to Foothill) in the appropriate amount to such Account Debtor. If, at a time
when an Event of Default has occurred and is continuing, any Account Debtor
returns any Inventory to Borrower, Borrower promptly shall determine the reason
for such return and, if Foothill consents (which consent shall not be
unreasonably withheld), issue a credit memorandum (with a copy to be sent to
Foothill) in the appropriate amount to such Account Debtor.
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6.7. TITLE TO EQUIPMENT. Upon Foothill's request, Borrower
immediately shall deliver to Foothill as collateral security for the Obligations
hereunder, properly endorsed, any and all evidences of ownership of,
certificates of title, or applications for title to any items of Equipment.
6.8. MAINTENANCE OF EQUIPMENT. Maintain the Equipment in good
operating condition and repair (ordinary wear and tear excepted), and make all
necessary replacements thereto so that the value and operating efficiency
thereof shall at all times be maintained and preserved. Other than those items
of Equipment that constitute fixtures on the Closing Date, Borrower shall not
permit any item of Equipment to become a fixture to real estate or an accession
to other property, and such Equipment shall at all times remain personal
property.
6.9. TAXES. Cause all assessments and taxes, whether real,
personal, or otherwise, due or payable by, or imposed, levied, or assessed
against Borrower or any of its property to be paid in full, before delinquency
or before the expiration of any extension period, except to the extent that the
validity of such assessment or tax shall be the subject of a Permitted Protest.
Borrower shall make due and timely payment or deposit of all such federal,
state, and local taxes, assessments, or contributions required of it by law, and
will execute and deliver to Foothill, on demand, appropriate certificates
attesting to the payment thereof or deposit with respect thereto. Borrower will
make timely payment or deposit of all tax payments and withholding taxes
required of it by applicable laws, including those laws concerning F.I.C.A.,
F.U.T.A., state disability, and local, state, and federal income taxes, and
will, upon request, furnish Foothill with proof satisfactory to Foothill
indicating that Borrower has made such payments or deposits.
6.10. INSURANCE
(a) At its expense, keep the Personal Property
Collateral insured against loss or damage by fire, theft, explosion, sprinklers,
and all other hazards and risks, and in such amounts, as are ordinarily insured
against by other owners in similar businesses. Borrower also shall maintain
business interruption, public liability, product liability, and property damage
insurance relating to Borrower's ownership and use of the Personal Property
Collateral, as well as insurance against larceny, embezzlement, and criminal
misappropriation.
(b) At its expense, obtain and maintain (i) insurance of
the type necessary to insure the Personal Property Collateral, for the full
replacement cost thereof, against any loss by fire, lightning, windstorm, hail,
explosion, aircraft, smoke damage, vehicle damage, earthquakes, elevator
collision, and other risks from time to time included under "extended coverage"
policies, in such amounts as Foothill may require, but in any event in amounts
sufficient to prevent Borrower from becoming a co-insurer under such policies,
(ii) combined single limit bodily injury and property damages insurance against
any loss, liability, or damages on, about, or relating to each business location
of Borrower, in an amount of not less than the coverage set forth on Schedule
6.10(b); and (iii) insurance for such other risks as Foothill may reasonably
require. Replacement costs, at Foothill's option, may be redetermined by an
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insurance appraiser, satisfactory to Foothill, not more frequently than once
every 12 months at Borrower's cost.
(c) All such policies of insurance shall be in such
form, with such companies, and in such amounts as may be reasonably satisfactory
to Foothill. All insurance required herein shall be written by companies which
are authorized to do insurance business in the State of New York. All hazard
insurance and such other insurance as Foothill shall specify, shall contain a
mortgagee endorsement satisfactory to Foothill, or an equivalent endorsement
satisfactory to Foothill, showing Foothill as sole loss payee thereof, and shall
contain a waiver of warranties. Every policy of insurance referred to in this
Section 6.10 shall contain an agreement by the insurer that it will not cancel
such policy except after 30 days prior written notice to Foothill and that any
loss payable thereunder shall be payable notwithstanding any act or negligence
of Borrower or Foothill which might, absent such agreement, result in a
forfeiture of all or a part of such insurance payment and notwithstanding (i)
occupancy or use of the Real Property Collateral for purposes more hazardous
than permitted by the terms of such policy, (ii) any foreclosure or other action
or proceeding taken by Foothill upon the happening of an Event of Default, or
(iii) any change in title or ownership of the Real Property. Borrower shall
deliver to Foothill certified copies of such policies of insurance and evidence
of the payment of all premiums therefor.
(d) Original policies or certificates thereof
satisfactory to Foothill evidencing such insurance shall be delivered to
Foothill at least 30 days prior to the expiration of the existing or preceding
policies. Borrower shall give Foothill prompt notice of any loss covered by such
insurance and, after and during the continuation of a Default or an Event of
Default, Foothill shall have the right to adjust any loss. Foothill shall have
the exclusive right to adjust all losses payable under any such insurance
policies without any liability to Borrower whatsoever in respect of such
adjustments. Any monies received as payment for any loss under any insurance
policy including the insurance policies mentioned above, shall be paid over to
Foothill to be applied at the option of Foothill either to the prepayment of the
Obligations without premium, in such order or manner as Foothill may elect, or
shall be disbursed to Borrower under stage payment terms satisfactory to
Foothill for application to the cost of repairs, replacements, or restorations.
All repairs, replacements, or restorations shall be effected with reasonable
promptness and shall be of a value at least equal to the value of the items or
property destroyed prior to such damage or destruction. Upon the occurrence of
an Event of Default, Foothill shall have the right to apply all prepaid premiums
to the payment of the Obligations in such order or form as Foothill shall
determine.
(e) Borrower shall not take out separate insurance
concurrent in form or contributing in the event of loss with that required to be
maintained under this Section 6.10, unless Foothill is included thereon as named
insured with the loss payable to Foothill pursuant to an endorsement
satisfactory to Foothill. Borrower immediately shall notify Foothill whenever
such separate insurance is taken out, specifying the insurer thereunder and full
particulars as to the policies evidencing the same, and originals of such
policies immediately shall be provided to Foothill.
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6.11. NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and
under the other Loan Documents by or on behalf of Borrower without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes.
6.12. LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory and
Equipment only at the locations identified on Schedule 6.12; provided, however,
that Borrower may amend Schedule 6.12 so long as such amendment occurs by
written notice to Foothill not less than 30 days prior to the date on which the
Inventory or Equipment is moved to such new location, so long as such new
location is within the continental United States, and so long as, at the time of
such written notification, Borrower provides any financing statements or fixture
filings necessary to perfect and continue perfected Foothill's security
interests in such assets and also provides to Foothill a Collateral Access
Agreement.
6.13. COMPLIANCE WITH LAWS Comply with the requirements of all
applicable laws, rules, regulations, and orders of any governmental authority,
including the Fair Labor Standards Act and the Americans With Disabilities Act,
other than laws, rules, regulations, and orders the non-compliance with which,
individually or in the aggregate, would not have and would not reasonably be
expected to have a Material Adverse Change.
6.14. EMPLOYEE BENEFITS.
(a) Promptly, and in any event within 20 Business Days
after Borrower or any of its Subsidiaries knows or has reason to know that an
ERISA Event has occurred that reasonably could be expected to result in a
Material Adverse Change, a written statement of the chief financial officer of
Borrower describing such ERISA Event and any action that is being taking with
respect thereto by Borrower, any such Subsidiary or ERISA Affiliate, and any
action taken or threatened by the IRS, Department of Labor, or PBGC. Promptly,
and in any event within 5 Business Days after the filing thereof with the IRS, a
copy (or if a copy is not available to Borrower, then a description thereof), of
which Borrower has or could reasonably be expected to have knowledge of each
funding waiver request filed with respect to any Benefit Plan and all
communications received by Borrower, any of its Subsidiaries or, to the
knowledge of Borrower, any ERISA Affiliate with respect to such request.
Promptly, and in any event within 5 Business Days after receipt by Borrower, any
of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate, of
the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed
to administer a Benefit Plan, copies of each such notice.
(b) Cause to be delivered to Foothill, upon Foothill's
request, each of the following to the extent available to Borrower: (i) a copy
of each Plan (or, where any such Plan is not in writing, a summary description
thereof) (and if applicable, related trust agreements or other funding
instruments) and all amendments thereto, all written interpretations thereof and
written descriptions thereof that have been distributed to employees or former
employees of Borrower or its Subsidiaries or an ERISA Affiliate thereof; (ii)
the most recent determination letter issued by the IRS with respect to each
Plan; (iii) for the three most recent plan years, annual reports on Form 5500
Series required to be filed with any governmental agency for each Plan; (iv) all
actuarial reports prepared for the last three plan years for each Benefit Plan;
(v) a
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listing of all Multiemployer Plans, with the aggregate amount of the most
recent annual contributions required to be made by Borrower or any ERISA
Affiliate to each such plan and copies of the collective bargaining agreements
requiring such contributions; (vi) any information that has been provided to
Borrower or any ERISA Affiliate regarding withdrawal liability under any
Multiemployer Plan; and (vii) the aggregate amount of the most recent annual
payments made to former employees of Borrower or its Subsidiaries or an ERISA
Affiliate thereof under any Retiree Health Plan.
6.15. LEASES. Pay when due all rents and other amounts payable
under any leases to which Borrower is a party or by which Borrower's properties
and assets are bound, unless such payments are the subject of a Permitted
Protest. To the extent that Borrower fails timely to make payment of such rents
and other amounts payable when due under its leases, Foothill shall be entitled,
in its discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.
6.16. YEAR 2000. Borrower and its Subsidiaries will continue to
review the areas within their business and operations which could be adversely
affected by, and have developed or will develop a program to address fully on a
timely basis (but in any event by no later than October 31, 1999), the Year 2000
Problem. At the request of Foothill from time to time (but no less than weekly),
the Borrower shall provide Foothill with interim status reports with respect to
its response to the Year 2000 Problem, and such status reports shall be in form
and substance satisfactory to Foothill.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, Borrower will not do any of the following:
7.1. INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
(a) Indebtedness evidenced by this Agreement;
(b) Indebtedness set forth in the latest financial
statements of Borrower submitted to Foothill on or prior to the Closing Date
(provided, however, that all Indebtedness under the Existing Loan Facility shall
be paid in full in cash on the Closing Date);
(c) Indebtedness secured by Permitted Liens;
(d) Permitted Subordinated Debt; and
(e) refinancings, renewals, or extensions of
Indebtedness permitted under clauses (b) through and including (d) of this
Section 7.1 (and continuance or renewal of any Permitted Liens associated
therewith) so long as: (i) the terms and conditions of such refinancings,
renewals, or extensions do not materially impair the prospects of repayment of
the
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Obligations by Borrower, (ii) the net cash proceeds of such refinancings,
renewals, or extensions do not result in an increase in the aggregate principal
amount of the Indebtedness so refinanced, renewed, or extended, (iii) such
refinancings, renewals, refundings, or extensions do not result in a shortening
of the average weighted maturity of the Indebtedness so refinanced, renewed, or
extended, and (iv) to the extent that Indebtedness that is refinanced was
subordinated in right of payment to the Obligations, then the subordination
terms and conditions of the refinancing Indebtedness must be at least as
favorable to Foothill as those applicable to the refinanced Indebtedness.
7.2. LIENS. Create, incur, assume, or permit to exist, directly
or indirectly, any Lien on or with respect to any of its property or assets, of
any kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(d) and so long as the replacement Liens only encumber those assets
or property that secured the original Indebtedness).
7.3. RESTRICTIONS ON FUNDAMENTAL CHANGES AND AMENDMENTS TO
QUALIFIED PRODUCTION CONTRACTS. Enter into any (x) merger, consolidation,
reorganization, or recapitalization, or reclassify its capital stock, or
liquidate, wind up, or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of,
in one transaction or a series of transactions, all or any substantial part of
its property or assets; or (y) amendment or modification of any Qualified
Production Contract that would have a material adverse effect on the perfection,
priority or enforceability of Foothill's Lien on the Collateral or would have a
material adverse effect on the value of the Collateral to Foothill.
7.4. DISPOSAL OF ASSETS. Sell, lease, assign, transfer, or
otherwise dispose of any of Borrower's properties or assets other than sales of
Inventory to buyers in the ordinary course of Borrower's business as currently
conducted, other than (x) assets in a maximum aggregate amount of $25,000 per
calendar year that are obsolete or no longer employed in the Borrower's business
and (y) Equipment sold by Borrower for a cash amount in excess of 120% of the
appraised orderly liquidation value of such Equipment (as determined by Foothill
based upon the March 1999 appraisal by Daley-Hodkin Appraisal Corporation or
another more recent appraisal acceptable to Foothill); provided, however, that
the cash proceeds of the dispositions permitted under the foregoing clause (x)
and/or clause (y) shall be applied by the Borrower as a prepayment on the
Capital Expenditure Loans (if the subject Equipment was purchased with proceeds
of a Capital Expenditure Loan) or as a prepayment on the Term Loan (if the
subject Equipment or other asset was not purchased with proceeds of a Capital
Expenditure Loan), in inverse order of maturity of principal installments; and
provided, further, that all non-cash proceeds of the foregoing shall be pledged
as Collateral to Foothill pursuant to arrangements satisfactory to Foothill
7.5. CHANGE NAME. Change Borrower's name, FEIN, or add any new
fictitious name, without thirty (30) days prior written notice to Foothill, or
change Borrower's corporate structure (within the meaning of Section 9402(7) of
the Code), or identity.
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7.6. GUARANTEE. Guarantee or otherwise become in any way liable
with respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of Borrower or which
are transmitted or turned over to Foothill.
7.7. NATURE OF BUSINESS. Make any change in the principal nature
of Borrower's business.
7.8. PREPAYMENTS AND AMENDMENTS.
(a) Except in connection with a refinancing permitted by
Section 7.1(d), prepay, redeem, retire, defease, purchase, or otherwise acquire
any Indebtedness owing to any third Person, other than the Obligations in
accordance with this Agreement, and
(b) Directly or indirectly, amend, modify, alter,
increase, or change any of the terms or conditions of any agreement, instrument,
document, indenture, or other writing evidencing or concerning Indebtedness
permitted under Sections 7.1(b), (c), or (d).
7.9. CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
7.10. [INTENTIONALLY OMITTED.]
7.11. DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or other property, other than capital stock or rights to
purchase capital stock) on, or purchase, acquire, redeem, or retire any of
Borrower's capital stock, of any class, whether now or hereafter outstanding.
7.12. ACCOUNTING METHODS. Except as provided on Schedule 7.12,
modify or change its method of accounting (other than changes required under
GAAP and concurred in by D&T or the Borrower's other nationally recognized
independent public accountants) or enter into, modify, or terminate any
agreement currently existing, or at any time hereafter entered into with any
third party accounting firm or service bureau for the preparation or storage of
Borrower's accounting records without said accounting firm or service bureau
agreeing to provide Foothill information regarding the Collateral or Borrower's
financial condition. Borrower waives the right to assert a confidential
relationship, if any, it may have with any accounting firm or service bureau in
connection with any information requested by Foothill pursuant to or in
accordance with this Agreement, and agrees that Foothill may contact directly
any such accounting firm or service bureau in order to obtain such information.
7.13. INVESTMENTS. Directly or indirectly make, acquire, or incur
any liabilities (including contingent obligations) for or in connection with (a)
the acquisition of the securities (whether debt or equity) of, or other
interests in, a Person, (b) loans, advances, capital contributions, or transfers
of property to a Person, other than loans and/or advances in the ordinary course
of business not exceeding an aggregate amount of $50,000 in any fiscal year of
Borrower or (c) the acquisition of all or substantially all of the properties or
assets of a Person.
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7.14. TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms, that are fully disclosed to Foothill, and that
are no less favorable to Borrower than would be obtained in an arm's length
transaction with a non-Affiliate.
7.15. SUSPENSION. Suspend or go out of a substantial portion of
its business.
7.16. COMPENSATION. Increase the aggregate fees paid to directors
during any year by more than 15% over the prior year.
7.17. USE OF PROCEEDS. Use (a) the proceeds of the Advances and
the Term Loan made hereunder for any purpose other than (i) on the Closing Date,
(y) to repay in full the outstanding principal, accrued interest, and accrued
fees and expenses owing to Existing Lender, and (z) to pay transactional costs
and expenses incurred in connection with this Agreement, and (ii) on the Closing
Date and thereafter, consistent with the terms and conditions hereof, for its
lawful and permitted corporate purposes, and (b) the proceeds of the Capital
Expenditure Loans made hereunder for any purpose other than to finance new
Equipment in accordance with Section 2.3.
7.18. CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location
without providing 30 days prior written notification thereof to Foothill and so
long as, at the time of such written notification, Borrower provides any
financing statements or fixture filings necessary to perfect and continue
perfected Foothill's security interests and also provides to Foothill a
Collateral Access Agreement with respect to such new location. The Inventory and
Equipment shall not at any time now or hereafter be stored with a bailee,
warehouseman, or similar party without Foothill's prior written consent.
7.19. NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or
indirectly:
(a) engage, or permit any Subsidiary or ERISA Affiliate
of Borrower to engage, in any prohibited transaction which is reasonably likely
to result in a civil penalty or excise tax described in Sections 406 of ERISA or
4975 of the IRC for which a statutory or class exemption is not available or a
private exemption has not been obtained from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Section 302 of ERISA and Section
412 of the IRC), whether or not waived;
(c) fail, or permit any Subsidiary or ERISA Affiliate of
Borrower to fail, to pay timely required contributions or annual installments
due with respect to any waived funding deficiency to any Benefit Plan;
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(d) terminate, or permit any Subsidiary or ERISA
Affiliate of Borrower to terminate, any Benefit Plan where such event would
result in any liability of Borrower, any of its Subsidiaries or any ERISA
Affiliate under Title IV of ERISA;
(e) fail, or permit any Subsidiary or ERISA Affiliate of
Borrower to fail, to make any required contribution or payment to any
Multiemployer Plan;
(f) fail, or permit any Subsidiary or ERISA Affiliate of
Borrower to fail, to pay any required installment or any other payment required
under Section 412 of the IRC on or before the due date for such installment or
other payment;
(g) amend, or permit any Subsidiary or ERISA Affiliate
of Borrower to amend, a Plan resulting in an increase in current liability for
the plan year such that either of Borrower, any Subsidiary of Borrower or any
ERISA Affiliate is required to provide security to such Plan under Section
401(a)(29) of the IRC; or
(h) withdraw, or permit any Subsidiary or ERISA
Affiliate of Borrower to withdraw, from any Multiemployer Plan where such
withdrawal is reasonably likely to result in any liability of any such entity
under Title IV of ERISA;
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $200,000.
7.20. FINANCIAL COVENANTS. Fail to maintain:
(a) Interest Coverage Ratio. An Interest Coverage Ratio
of at least 1.75 to 1.00, measured on a fiscal quarter end basis for the fiscal
quarter then ended.
7.21. CAPITAL EXPENDITURES. Make capital expenditures in any
fiscal year in excess of $2,500,000.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event
of default (each, an "Event of Default") under this Agreement:
8.1. If Borrower fails to pay when due and payable or when
declared due and payable, any portion of the Obligations (whether of principal,
interest (including any interest which, but for the provisions of the Bankruptcy
Code, would have accrued on such amounts), fees and charges due Foothill,
reimbursement of Foothill Expenses, or other amounts constituting Obligations);
8.2. (a) If Borrower fails or neglects to perform, keep or
observe any term, provision, condition, covenant or agreement contained in
Sections 6.4 (Tax Returns), 6.7 (Title to Equipment), 6.8 (Maintenance of
Equipment), 6.13 (Compliance with Laws), 6.14 (Employee
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Benefits) or 6.15 (Leases) of this Agreement and such failure continues for a
period of 15 Business Days: (b) if Borrower fails or neglects to perform, keep
or observe any term, provision, condition, covenant or agreement contained in
Section 6.1 (Amendments to Qualified Production Contracts), Section 6.2
(Collateral Reporting) or Section 6.3 (Financial Statements, Reports,
Certificates) of this Agreement and such failure continues for a period of 5
Business Days; or (c) Borrower fails or neglects to perform, keep, or observe
any other term, provision, condition, covenant or agreement contained in this
Agreement, or in any of the other Loan Documents; in each case, other than any
such term, provision, condition, covenant, or agreement that is the subject of
another provision of this Section 8, in which event such other provision of this
Section 8 shall govern;
8.3. If any material portion of Borrower's properties or assets
is attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any third Person;
8.4. If an Insolvency Proceeding is commenced by Borrower;
8.5. If an Insolvency Proceeding is commenced against Borrower
and any of the following events occur: (a) Borrower consents to the institution
of the Insolvency Proceeding against it; (b) the petition commencing the
Insolvency Proceeding is not timely controverted; (c) the petition commencing
the Insolvency Proceeding is not dismissed within 45 calendar days of the date
of the filing thereof; provided, however, that, during the pendency of such
period, Foothill shall be relieved of its obligation to extend credit
hereunder; (d) an interim trustee is appointed to take possession of all or a
substantial portion of the properties or assets of, or to operate all or any
substantial portion of the business of, Borrower; or (e) an order for relief
shall have been issued or entered therein;
8.6. If Borrower is enjoined, restrained, or in any way
prevented by court order from continuing to conduct all or any material part of
its business affairs;
8.7. If a notice of Lien, levy, or assessment is filed of record
with respect to any of Borrower's properties or assets (valued individually or
in the aggregate at any time in excess of $200,000) by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, or if any taxes or debts owing
at any time hereafter to any one or more of such entities becomes a Lien,
whether choate or otherwise, upon any of Borrower's properties or assets (valued
individually or in the aggregate at any time in excess of $200,000) and the same
is not paid on the payment date thereof;
8.8. If a judgment or other claim becomes a Lien or encumbrance
upon any of Borrower's properties or assets (valued individually or in the
aggregate at any time in excess of $200,000);
8.9. If there is a default in any agreement for Indebtedness for
borrowed money to which Borrower is a party with one or more third Persons and
such default (a) occurs at the final maturity of the obligations thereunder, or
(b) results in a right by such third Person(s),
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irrespective of whether exercised, to accelerate the maturity of Borrower's
obligations thereunder;
8.10. If Borrower makes any payment on account of Indebtedness
that has been contractually subordinated in right of payment to the payment of
the Obligations, except to the extent such payment is permitted by the terms of
the subordination provisions applicable to such Indebtedness;
8.11. If any misstatement or misrepresentation in any material
respect exists now or hereafter in any warranty, representation, statement, or
report made to Foothill by Borrower or any officer, employee, agent, or director
of Borrower, or if any such warranty or representation is withdrawn; or
8.12. If the obligation of any guarantor under its guaranty or
other third Person under any Loan Document is limited or terminated by operation
of law or by the guarantor or other third Person thereunder, or any such
guarantor or other third Person becomes the subject of an Insolvency Proceeding.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1. RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default Foothill may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable;
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement, under any of the Loan Documents,
or under any other agreement between Borrower and Foothill;
(c) Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of Foothill, but without
affecting Foothill's rights and security interests in the Personal Property
Collateral or the Real Property Collateral and without affecting the
Obligations;
(d) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Foothill considers advisable,
and in such cases, Foothill will credit Borrower's Loan Account with only the
net amounts received by Foothill in payment of such disputed Accounts after
deducting all Foothill Expenses incurred or expended in connection therewith;
(e) Cause Borrower to hold all returned Inventory in
trust for Foothill, segregate all returned Inventory from all other property of
Borrower or in Borrower's possession and conspicuously label said returned
Inventory as the property of Foothill;
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(f) Without notice to or demand upon Borrower or any
guarantor, make such payments and do such acts as Foothill considers necessary
or reasonable to protect its security interests in the Collateral. Borrower
agrees to assemble the Personal Property Collateral if Foothill so requires, and
to make the Personal Property Collateral available to Foothill as Foothill may
designate. Borrower authorizes Foothill to enter the premises where the Personal
Property Collateral is located, to take and maintain possession of the Personal
Property Collateral, or any part of it, and to pay, purchase, contest, or
compromise any encumbrance, charge, or Lien that in Foothill's determination
appears to conflict with its security interests and to pay all expenses incurred
in connection therewith. With respect to any of Borrower's owned or leased
premises, Borrower hereby grants Foothill a license to enter into possession of
such premises and to occupy the same, without charge, for up to 120 days in
order to exercise any of Foothill's rights or remedies provided herein, at law,
in equity, or otherwise;
(g) Without notice to Borrower (such notice being
expressly waived), and without constituting a retention of any collateral in
satisfaction of an obligation (within the meaning of Section 9505 of the Code),
set off and apply to the Obligations any and all (i) balances and deposits of
Borrower held by Foothill (including any amounts received in the Lockbox
Accounts), or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by Foothill;
(h) Hold, as cash collateral, any and all balances and
deposits of Borrower held by Foothill, and any amounts received in the Lockbox
Accounts, to secure the full and final repayment of all of the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Personal Property Collateral. Foothill is hereby granted a
license or other right to use, without charge, Borrower's labels, patents,
copyrights, rights of use of any name, trade secrets, trade names, trademarks,
service marks, and advertising matter, or any property of a similar nature, as
it pertains to the Personal Property Collateral, in completing production of,
advertising for sale, and selling any Personal Property Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure to
Foothill's benefit;
(j) Sell the Personal Property Collateral at either a
public or private sale, or both, by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such places (including
Borrower's premises) as is commercially reasonable. It is not necessary that the
Personal Property Collateral be present at any such sale;
(k) Foothill shall give notice of the disposition of the
Personal Property Collateral as follows:
(1) Foothill shall give Borrower and each holder
of a security interest in the Personal Property Collateral who has filed with
Foothill a written request for notice, a notice in writing of the time and place
of public sale, or, if the sale is a private sale or
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some other disposition other than a public sale is to be made of the Personal
Property Collateral, then the time on or after which the private sale or other
disposition is to be made;
(2) The notice shall be personally delivered or
mailed, postage prepaid, to Borrower as provided in Section 12, at least 5 days
before the date fixed for the sale, or at least 5 days before the date on or
after which the private sale or other disposition is to be made; no notice needs
to be given prior to the disposition of any portion of the Personal Property
Collateral that is perishable or threatens to decline speedily in value or that
is of a type customarily sold on a recognized market. Notice to Persons other
than Borrower claiming an interest in the Personal Property Collateral shall be
sent to such addresses as they have furnished to Foothill;
(3) If the sale is to be a public sale, Foothill
also shall give notice of the time and place by publishing a notice one time at
least 5 days before the date of the sale in a newspaper of general circulation
in the county in which the sale is to be held;
(l) Foothill may credit bid and purchase at any public
sale; and
(m) Any deficiency that exists after disposition of the
Personal Property Collateral as provided above will be paid immediately by
Borrower. Any excess will be returned, without interest and subject to the
rights of third Persons, by Foothill to Borrower.
9.2. REMEDIES CUMULATIVE. Foothill's rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Foothill shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by
Foothill of one right or remedy shall be deemed an election, and no waiver by
Foothill of any Event of Default shall be deemed a continuing waiver. No delay
by Foothill shall constitute a waiver, election, or acquiescence by it.
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes, assessments,
insurance premiums, or, in the case of leased properties or assets, rents or
other amounts payable under such leases) due to third Persons, or fails to make
any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Foothill
determines that such failure by Borrower would reasonably be expected to result
in a Material Adverse Change, in its discretion and without prior notice to
Borrower, Foothill may do any or all of the following: (a) make payment of the
same or any part thereof; (b) set up such reserves in Borrower's Loan Account as
Foothill deems necessary to protect Foothill from the exposure created by such
failure; or (c) obtain and maintain insurance policies of the type described in
Section 6.10, and take any action with respect to such policies as Foothill
deems prudent. Any such amounts paid by Foothill shall constitute Foothill
Expenses. Any such payments made by Foothill shall not constitute an agreement
by Foothill to make similar payments in the future or a waiver by Foothill of
any Event of Default under this Agreement. Foothill need not inquire as to, or
contest the validity of, any such expense, tax, or Lien and the
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<PAGE> 48
receipt of the usual official notice for the payment thereof shall be conclusive
evidence that the same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Borrower waives demand, protest,
notice of protest, notice of default or dishonor, notice of payment and
nonpayment, nonpayment at maturity, release, compromise, settlement, extension,
or renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Foothill on which Borrower may in any way be liable.
11.2 FOOTHILL'S LIABILITY FOR COLLATERAL. So long as Foothill
complies with its obligations, if any, under Section 9207 of the Code, Foothill
shall not in any way or manner be liable or responsible for: (a) the safekeeping
of the Collateral; (b) any loss or damage thereto occurring or arising in any
manner or fashion from any cause; (c) any diminution in the value thereof; or
(d) any act or default of any carrier, warehouseman, bailee, forwarding agency,
or other Person. All risk of loss, damage, or destruction of the Collateral
shall be borne by Borrower.
11.3 INDEMNIFICATION. Borrower shall pay, indemnify, defend, and
hold Foothill, each Participant, and each of their respective officers,
directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from and
against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all reasonable attorneys fees and disbursements
and other costs and expenses actually incurred in connection therewith (as and
when they are incurred and irrespective of whether suit is brought), at any time
asserted against, imposed upon, or incurred by any of them in connection with or
as a result of or related to the execution, delivery, enforcement, performance,
and administration of this Agreement and any other Loan Documents or the
transactions contemplated herein, and with respect to any investigation,
litigation, or proceeding related to this Agreement, any other Loan Document, or
the use of the proceeds of the credit provided hereunder (irrespective of
whether any Indemnified Person is a party thereto), or any act, omission, event
or circumstance in any manner related thereto (all the foregoing, collectively,
the "Indemnified Liabilities"). Borrower shall have no obligation to any
Indemnified Person under this Section 11.3 with respect to any Indemnified
Liability that a court of competent jurisdiction finally determines to have
resulted from the gross negligence or willful misconduct of such Indemnified
Person. This provision shall survive the termination of this Agreement and the
repayment of the Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other Loan Document shall
be in writing and (except for financial statements and other informational
documents which may be sent by first-class mail, postage prepaid) shall be
personally delivered or sent by registered or certified mail (postage prepaid,
return receipt requested), overnight courier, or telefacsimile to Borrower or to
Foothill, as the case may be, at its address set forth below:
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IF TO BORROWER: AMERICAN BANK NOTE
HOLOGRAPHICS, INC.
399 Executive Boulevard,
Elmsford, NY 10523
Attn: Kenneth H. Traub
Fax No. 914. 592. 4469
WITH COPIES TO: FULBRIGHT & JAWORSKI L.L.P.
666 Fifth Avenue
New York, New York 10103-3198
Attn: Paul Jacobs, Esq.
Fax No. 212. 752. 5958
IF TO FOOTHILL: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. 310.478.9788
WITH COPIES TO: HAHN & HESSEN LLP
350 Fifth Avenue
New York, New York 10118
Attn: Leonard Lee Podair, Esq.
Fax No. 212.594.7167
The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given to
the other. All notices or demands sent in accordance with this Section 12, other
than notices by Foothill in connection with Sections 9504 or 9505 of the Code,
shall be deemed received on the earlier of the date of actual receipt or 3 days
after the deposit thereof in the mail. Borrower acknowledges and agrees that
notices sent by Foothill in connection with Sections 9504 or 9505 of the Code
shall be deemed sent when deposited in the mail or personally delivered, or,
where permitted by law, transmitted telefacsimile or other similar method set
forth above.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
(UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN AN ANOTHER LOAN DOCUMENT), THE
CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS
OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER
OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. THE
PARTIES AGREE THAT
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ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE
OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL
COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK OR, AT THE SOLE
OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH FOOTHILL SHALL INITIATE LEGAL OR
EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER
IN CONTROVERSY. EACH OF BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED
UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM
NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 13. BORROWER AND FOOTHILL HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH OF BORROWER AND FOOTHILL REPRESENTS
THAT IT HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS
JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A
TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers
delivered to Foothill may be destroyed or otherwise disposed of by Foothill 4
months after they are delivered to or received by Foothill, unless Borrower
requests, in writing, the return of said documents, schedules, or other papers
and makes arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrower and Foothill.
15.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure
to the benefit of the respective successors and assigns of each of the parties;
provided, however, that Borrower may not assign this Agreement or any rights or
duties hereunder without Foothill's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Foothill
shall release Borrower from its Obligations. Foothill may assign this Agreement
and its rights and duties hereunder and no consent or approval by Borrower is
required in connection with any such assignment. Foothill reserves the right to
sell, assign, transfer, negotiate, or grant participations in all or any part
of, or any interest in Foothill's rights and benefits hereunder. In connection
with any such assignment or participation, Foothill may disclose all documents
and information which Foothill now or hereafter may have relating to Borrower or
Borrower's business. To the extent that Foothill assigns its rights and
obligations
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hereunder to a third Person, Foothill thereafter shall be released from such
assigned obligations to Borrower and such assignment shall effect a novation
between Borrower and such third Person.
15.3 SECTION HEADINGS. Headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
15.4 INTERPRETATION. Neither this Agreement nor any uncertainty
or ambiguity herein shall be construed or resolved against Foothill or Borrower,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
15.5 SEVERABILITY OF PROVISIONS. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
15.6 AMENDMENTS IN WRITING. This Agreement can only be amended
by a writing signed by both Foothill and Borrower.
15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may
be executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver an original executed
counterpart of this Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Agreement.
15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence
or payment of the Obligations by Borrower or any guarantor of the Obligations or
the transfer by either or both of such parties to Foothill of any property of
either or both of such parties should for any reason subsequently be declared to
be void or voidable under any state or federal law relating to creditors'
rights, including provisions of the Bankruptcy Code relating to fraudulent
conveyances, preferences, and other voidable or recoverable payments of money or
transfers of property (collectively, a "Voidable Transfer"), and if Foothill is
required to repay or restore, in whole or in part, any such Voidable Transfer,
or elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that Foothill is required or
elects to repay or restore, and as to all reasonable costs, expenses, and
attorneys fees of Foothill related thereto, the liability of Borrower or such
guarantor automatically shall be revived, reinstated, and restored and shall
exist as though such Voidable Transfer had never been made.
15.9 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated
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hereby and shall not be contradicted or qualified by any other agreement, oral
or written, before the date hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in Los Angeles, California.
AMERICAN BANK NOTE HOLOGRAPHICS, INC.,
A DELAWARE CORPORATION
By /s/ KENNETH TRAUB
-------------------------------------------
Title: Kenneth Traub, President
---------------------------------------
FOOTHILL CAPITAL CORPORATION,
A CALIFORNIA CORPORATION
By /s/ CHRISTOPHER MacDONALD
-------------------------------------------
Title: Christopher MacDonald, Sr. V.P.
---------------------------------------
<PAGE> 1
Exhibit 10.11
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, (this "Agreement"), is made and entered into
as of April 20, 1999, by and between Salvatore F. D'Amato (the "Executive") and
American Bank Note Holographics, Inc., a Delaware corporation (the "Company").
RECITAL
WHEREAS, the Executive has been acting as a consultant to the Company;
WHEREAS, in light of recent events which are generally described in the
Company's recent press releases of January 19, 1999, January 25, 1999, and
February 1, 1999, the Company desires to formally retain the Executive to render
executive and managerial services and the Executive desires to render such
services; and
WHEREAS, the Company and the Executive desire to set forth herein the
terms and conditions on which the Company will employ the Executive, and the
Executive will accept employment with the Company.
AGREEMENT
NOW THEREFORE, in consideration of the mutual promises set forth in this
Agreement and intending to be legally bound, Executive and the Company agree as
follows:
SECTION 1. EMPLOYMENT. The Company hereby employs Executive and Executive
hereby accepts such employment and agrees to render services to the Company,
upon the terms and conditions set forth in this Agreement.
SECTION 2. POSITION AND DUTIES. Executive shall assume the responsibilities
and perform the duties of Chairman of the Board of Directors of the Company. The
Executive shall also serve in such similar capacities as may be assigned to him
in good faith from time to time by the Board of Directors of the Company (the
"Board"). Executive agrees to devote the majority of his business time,
attention, skill and best efforts to the diligent performance of his duties
hereunder and shall be loyal to the Company and its affiliates and subsidiaries,
and use his best efforts to further their interests. Executive agrees to spend
approximately 3 to 4 days per week on behalf of the Company. The Executive shall
work with the President of the Company in furthering the worldwide general
management, administration and operation of all present and future business of
the Company, including, without limitation, those operations set forth in the
By-laws of the Company. In the performance of his duties, Executive agrees to
abide by and comply with all policies, practices, handbooks, procedures and
guidelines which are now in effect or which the Company may adopt, modify,
supplement or change from time to time.
<PAGE> 2
SECTION 3. TERM OF EMPLOYMENT. The term of employment hereunder shall commence
on the date hereof and shall continue thereafter until the earlier of (i) two
years from the date hereof or (ii) termination pursuant to Section 10 hereof
(the "Employment Term"). This Agreement shall be renewable for 1 year term(s)
with mutual agreement.
SECTION 4. EXCLUSIVITY. During the term of Executive's employment with the
Company, Executive shall not without the prior written consent of the Board (i)
perform any managerial, sales, marketing or technical services directly or
indirectly for any person or entity competing directly or indirectly with the
Company or any of its subsidiaries in the holography business; (ii) perform any
such services for any entity owned, directly or indirectly, by anyone competing,
either directly or indirectly, with the Company or any of its subsidiaries in
the holography business; (iii) on his own behalf or that of any other person or
entity, compete, either directly or indirectly, with the Company or any of its
subsidiaries, to sell any products or services marketed or offered by the
Company or any of its subsidiaries; (iv) engage or become interested, directly
or indirectly, as owner, employer, partner, consultant, through stock ownership
(except ownership of less than one percent of the number of shares outstanding
of any securities which are listed for trading on any securities exchange,
provided that the specific nature and amount of the investment, if over $50,000
shall be immediately disclosed to the Company in writing), investment of
capital, lending of money or property, or otherwise either alone or in
association with others, in the operation of any type of business or enterprise
which conflicts or interferes with the performance of Executive's services
hereunder or (v) engage in any activities which could reasonable be deemed to be
a conflict of interest with his duties hereunder or his obligations to the
Company.
SECTION 5. COMPENSATION AND BENEFITS.
(a) Salary and Bonus. As compensation for the performance of the
Executive's services hereunder, during the Employment Term, the Company will pay
to the Executive a base salary of $14,300 per month (the "Salary"). Within 30
days following the end of each of the Company's fiscal quarters, the Board shall
determine if the Executive is eligible to receive a bonus (the "Bonus"). The
Executive's Salary and any Bonus will be payable in accordance with the
customary payroll practices of the Company for its senior management personnel.
(b) Benefits. During the Employment Term, the Executive shall be
eligible to participate, on the same basis and subject to the same
qualifications as other senior management personnel of the Company, in any
pension, profit sharing, savings, bonus, life insurance, health insurance,
hospitalization, dental, drug prescription, disability, accidental death and
dismemberment and other benefit plans and policies as may from time to time be
in effect with respect to senior management personnel of the Company
(collectively, the "Benefits"). The Company will provide Executive with a Lexus
400 automobile for Executive's use during the term of this Agreement. After the
two-year term of this Agreement, the Company will assign the ownership of the
automobile to the Executive. The Executive shall also be entitled to vacation
days (including the right to accrue unused vacation time from year to year if
the Agreement is renewed pursuant to Section 3 above), holidays and sick days in
accordance with the policies of the Company as may be in effect from time to
time; provided, however, that upon termination of Executive's employment for any
reason (including resignation by the Executive), the Company shall pay Executive
for accrued vacation time unused as of the last date of
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employment, on a pro rated basis calculated on the basis of the Executive's
Salary and Bonus in effect on the Termination Date. Upon mutual agreement of the
Company and the Executive that it would be beneficial to both parties for the
Executive to relocate his personal residence in connection with his employment
hereunder, the Company shall reimburse the Executive for the reasonable expenses
related to such relocation upon the submission of supporting documentation for
such expenses.
(c) Stock Options. As additional compensation hereunder, the
Executive shall be granted stock options to purchase up to 175,000 shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"), at an
exercise price equal to the closing market price of the Common Stock on the last
date on which the New York Stock Exchange was open for trading immediately prior
to the date hereof. The options and any shares of Common Stock underlying the
options may be subject to certain restrictions as disclosed in the 1998 Plan
(the "Restricted Stock"). Subsequent grants of options to purchase equity in the
Company during the Employment Term will be made at the sole discretion of the
Board or the Compensation Committee. The Company will use reasonable efforts to
file a registration statement on Form S-8 under the Securities Act of 1933, as
amended, to register all shares of Common Stock issued to the Executive under
the 1998 Plan.
(d) Expenses. The Company will pay or promptly reimburse the
Executive for all reasonable out-of-pocket business, entertainment and travel
expenses incurred by the Executive in the performance of his duties hereunder
upon presentation of appropriate supporting documentation and otherwise in
accordance with the expense reimbursement policies of the Company in effect from
time to time. It is the Company's policy to reimburse its senior executives that
live greater than 50 miles away from the Company's corporate offices for all
reasonable expenses associated with travelling to and staying in hotels near the
Company's offices. Pursuant to this policy, Executive is entitled to stay in
hotels as much as he determines is necessary in his reasonable discretion, and
the Company will reimburse executive for all reasonable travel, hotel costs, and
meals upon the presentation of expense reports and receipts by Executive.
(e) Taxes and Withholdings. All appropriate deductions, including
federal, state and local taxes and social security, shall be deducted from any
amount paid by the Company to the Executive hereunder in conformity with
applicable laws.
SECTION 6. CONFIDENTIALITY. The Executive acknowledges and agrees that (a) in
connection with his employment by the Company, the Executive will be involved in
the Company's and its subsidiaries' (if any) operations; (b) in order to permit
him to carry out his responsibilities, the Company may disclose, to the
Executive, in strict confidence, or the Executive may develop, confidential
proprietary information and trade secrets of the Company and its affiliates,
including without limitation (i) unpublished information with respect to the
Company concerning marketing or sales plans, operational techniques, strategic
plans and the identity of suppliers and supply contacts; (ii) unpublished
financial information with respect to the Company, including information
concerning revenues, profits and profit margins; (iii) internal confidential
manuals and memos; and (iv) "material inside information" as such phrase is used
for purposes of the Securities Exchange Act of 1934, as amended (collectively,
"Confidential Information"); and (c) the Company and its affiliates derive
significant economic value and competitive advantage by reason of the fact that
such Confidential Information, in whole or in part, is not generally known or
readily ascertainable by the Company's or its affiliates' actual or
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<PAGE> 4
potential competitors and, as such, constitutes the Company's and its
affiliates' valuable trade secrets.
In addition to any obligations set forth herein, and in recognition
of the foregoing acknowledgments, for himself and on behalf of his affiliates,
the Executive agrees that he will not, directly or indirectly, use, disseminate
or disclose, any Confidential Information (other than for the legitimate
business purposes of the Company), and that he will not knowingly permit any of
his affiliates to, directly or indirectly, use, disseminate or disclose, any
Confidential Information. At the end of the Employment Term, the Executive
agrees to deliver immediately to the Company the originals and all copies of
Confidential Information in his possession or control, whether in written form,
on computers or discs or otherwise.
The restrictions set forth in this Section 6 shall not apply to
those particular portions of Confidential Information, if any, that (a) have
been published by any of the Company or any of its affiliates in a patent,
article or other similar tangible publication or (b) become available to the
Executive from a source other than the Company, provided that the source of such
Confidential Information was not known by the Executive, after reasonable
inquiry, to be bound by a confidentiality agreement with or other obligation of
confidentiality to the Company or any of its affiliates.
The foregoing restrictions on the disclosure of Confidential
Information set forth in this Section 6 shall not apply to those particular
portions of Confidential Information, if any, that are required to be disclosed
in connection with any legal process; provided that, at least ten (10) days in
advance of any required disclosure, or such lesser time as may be required by
circumstances, the Executive shall furnish the Company with a copy of the
judicial or administrative order requiring that such information be disclosed
together with a written description of the information proposed to be disclosed
(which description shall be in sufficient detail to enable the Executive and its
affiliates to determine the nature and scope of the information proposed to be
disclosed), and the Executive covenants and agrees to cooperate with the Company
and its affiliates to deliver the minimum amount of information necessary to
comply with such order.
This Section 6 shall survive any termination of this Agreement.
SECTION 7. COVENANT NOT TO COMPETE.
(a) Scope. In order to fully protect the Company's Confidential
Information, during the Employment Term and for a period of one year thereafter
(the "Non-competition Period"), the Executive shall not, except as authorized in
writing by the Board, directly or indirectly, render services to, assist,
participate in the affairs of, or otherwise be connected with, any person or
enterprise (other than the Company and its subsidiaries, if any), which person
or enterprise is engaged in, or is planning to engage in, and shall not
personally engage in any business that is competitive with the business of the
Company or any of its subsidiaries, if any, with respect to any products or
services of the Company or any of its subsidiaries, if any, in any capacity
which would utilize the
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Executive's services with respect to any products or services of the Company or
any of its subsidiaries, if any, that were within the Executive's management
responsibility at any time within the twelve (12) month period immediately prior
to the Termination Date.
(b) Remedies. The parties recognize, acknowledge and agree that
(i) any breach or threatened breach of the provisions of this Section 7 shall
cause irreparable harm and injury to the Company and that money damages will not
provide an adequate remedy for such breach or threatened breach and (ii) the
duration, scope and geographical application of this Agreement are fair and
reasonable under the circumstances, and are reasonably required to protect the
legitimate business interests of the Company. Accordingly, Executive agrees that
the Company shall be entitled to have the provisions of this Agreement
specifically enforced by any court having jurisdiction, and that such a court
may issue a temporary restraining order, preliminary injunction or other
appropriate equitable relief, without having to prove the inadequacy of
available remedies at law. In addition, the Company shall be entitled to avail
itself of all such other actions and remedies available to it or any of its
affiliates under law or in equity and shall be entitled to such damages as it
sustains by reason of such breach or threatened breach. It is the express desire
and intent of the parties that the provisions of this Agreement be enforced to
the full extent possible.
(c) Severability. If any provision of Section 7(a) is held to be
unenforceable because of the duration of such provision, the area covered
thereby or the scope of the activity restrained, the parties hereby expressly
agree that the court making such determination shall have the power to reduce
the duration and/or areas of such provision and/or the scope of the activity to
be restrained contained in such provision and, in its reduced form, such
provision shall then be enforceable. The parties hereto intend and agree that
the covenants contained in Section 7(a) shall be construed as a series of
separate covenants, one for each municipality, community or county included
within the area designated by Section 7(a). Except for geographic coverage, the
terms and conditions of each such separate covenant shall be deemed identical to
the covenant contained in Section 7(a). Furthermore, if any court shall refuse
to enforce any of the separate covenants deemed included in Section 7(a), then
such unenforceable covenant shall be deemed eliminated from the provisions
hereof to the extent necessary to permit the remaining separate covenants to be
enforced in accordance with their terms. The prevailing party in any action
arising out of a dispute in respect of any provision of this Agreement shall be
entitled to recover from the non-prevailing party reasonable attorneys' fees and
costs and disbursements incurred in connection with the prosecution or defense,
as the case may be, of any such action.
SECTION 8. RESPONSIBILITY UPON TERMINATION. Upon the termination of his
employment for any reason and irrespective of whether or not such termination is
voluntary on his part:
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(a) The Executive shall advise the Company of the identity of his
new employer within then (10) days after accepting new employment and further
agrees to keep the Company so advised of any change in employment during the
Non-competition Period;
(b) The Company in its sole discretion may notify any new
employer of the Executive that he has an obligation not to compete with the
Company during the Non-competition Period; and
(c) The Executive shall deliver to the Company any and all
records, forms, contracts, memoranda, work papers, customer data and any other
documents (whether in written form, on computers or discs or otherwise) which
have come into his possession by reason of his employment with the Company,
irrespective of whether or not any of said documents were prepared for him, and
he shall not retain memoranda in respect of or copies of any of said documents.
SECTION 9. NONSOLICITATION. The Executive agrees that during the term of his
employment with the Company and for a period of twelve (12) months thereafter,
he will not, and will not assist any of his affiliates to, directly or
indirectly, recruit or otherwise solicit or induce any executive, customer,
subscriber or supplier of the Company or any of its subsidiaries about whom or
which he gained Confidential Information while at the Company to terminate its
employment or arrangement with the Company or any of its subsidiaries, otherwise
change its relationship with the Company or any of its subsidiaries, or
establish any relationship with the Executive or any of his affiliates for any
business purpose deemed materially competitive with the business of the Company
or any of its subsidiaries, if any.
SECTION 10. TERMINATION.
(a) Termination for Cause. Notwithstanding anything contained
herein to the contrary, the Board may terminate the Executive's employment with
the Company for cause; provided that the Executive shall be given notice of the
Company's intent to terminate his employment for cause, the nature of the cause
and, if curable, a reasonable opportunity to remedy the cause. For the purposes
of this Section 10(a), the term "reasonable" shall mean that amount of time
deemed reasonable by the Board acting in good faith and in light of the nature
of the cause. For purposes of this Agreement, the term "cause" shall mean, the
occurrence of any one or more of the following (i) the commission of any act of
willful and material embezzlement or fraud on the part of Executive against the
Company, (ii) any act or omission which constitutes a willful and material
breach by Executive of this Agreement, including a refusal or failure by
Executive to perform his duties and obligations hereunder, (iii) Executive has
been convicted of a crime, which conviction has, or is reasonably likely to have
a material adverse effect on the Company, or its business or will prevent the
Executive from performing his duties for a sustained period of time, (iv)
Executive becomes Disabled (as hereinafter defined), or (v) the death of
Executive; provided, however, that "cause" shall not include any act or omission
by the Executive undertaken in the good faith exercise of
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the Executive's business judgment as Chairman or in good faith reliance on the
advice of counsel. For purposes of this Agreement, "Disabled" shall mean
Executive's inability, due to illness, accident or any other physical or mental
condition, to fully perform the essential functions of his position or this
Agreement for more than 26 weeks consecutively or for intermittent periods
aggregating 39 weeks during any 78-week period during the Employment Term,
except as otherwise required by law.
If, during the Employment Term the Company terminates the
Executive's employment pursuant to clauses (i), (ii) or (iii) of this paragraph
(a), then, from and after the date the Executive's termination is effective (the
"Termination Date"), the Executive shall (a) have no right to receive any
further Salary following the Termination Date, (b) be entitled to receive any
Bonus, payable on a pro rata basis, which may have accrued or which otherwise
would have been granted by the Board had the Executive not been terminated, for
the year in which the Executive was terminated (c) cease to be covered under or
be permitted to participate in any Benefits (except payments due to the
Executive or the Executive's beneficiaries or representatives under any
applicable life or disability insurance plans or policies) and (d) shall have no
further right to purchase shares of Common Stock pursuant to the 1998 Plan;
provided, however, that all restrictions on Restricted Stock purchased by the
Executive shall, subject to applicable securities laws, rules and regulations,
lapse on the Termination Date.
If during the Employment Term the Company terminates the Executive
employment pursuant to clause (iv) or (v) of this paragraph (a), (a) the Company
shall continue to pay the Executive (or his beneficiaries, as applicable) Salary
then in effect for the remainder of the Employment Term in accordance with the
customary payroll practices for its senior management personnel, (b) the
Executive shall be entitled to receive any Bonus, payable on a pro rata basis,
which may have accrued or which otherwise would have been granted by the Board
had the Executive not been terminated for the year in which the Executive was
terminated, and (c) the Executive shall be entitled to all rights with respect
to any options granted or Common Stock purchased under the 1998 Plan for a
period of two years following the Termination Date and all restrictions on
Restricted Stock purchased by the Executive shall, subject to applicable
securities laws, rules and regulations, lapse on the Termination Date.
(b) Termination Without Cause and Resignation For Good Reason.
The Company shall have the right to terminate this Agreement and the employment
of Executive with the Company for any reason or no reason and without cause upon
written notice to Executive of such termination, and the Executive shall have
the right to resign for Good Reason (as hereinafter defined); provided that,
except as otherwise provided in paragraph (c) below, (i) the Company shall
continue to pay to the Executive the Salary then in effect, together with any
Bonus which may have accrued or which otherwise would have been granted by the
Board had the Executive not been terminated or resigned for the remainder of the
Employment Term as set forth in Section 3, in accordance with the customary
payroll practices of the Company for its senior management personnel, (ii) the
Company shall continue any benefits in which the Executive then participates on
the same basis of participation and subject to all the terms and conditions of
such plans as applied prior to such termination or resignation, (iii) all
non-vested stock options to purchase shares of Common Stock granted under the
1998 Plan shall vest on the Termination Date and the Executive shall be entitled
to all rights with respect to such options or Common Stock purchased under the
1998 Plan for a period of two years following the Termination Date, (iv) the
Company shall assign to the Executive the automobile provided to the Executive
pursuant to Section 5(b) above.
(c) Termination Upon Change of Control or Resignation for Good
Reason Following a Change of Control. In the event Executive's employment is
terminated by the Company subsequent to a Change of Control (as hereinafter
defined) or
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the Executive resigns from the Company for Good Reason (as hereinafter defined)
within one year following a Change of Control, the Company will pay the
Executive a severance amount equal to $171,600 plus the ownership of the Lexus
400 automobile that had previously been provided to Executive. To the extent
that such amounts are in excess of the amount allowable as a deduction under
Section 280(G) of the Code, or are subject to excise tax pursuant to Section
4999 of the Code, the Company will gross-up any additional amounts due, and all
non-vested options to purchase shares of Common Stock granted under the 1998
Plan shall vest on the Termination Date and all restrictions on Restricted Stock
purchased by the Executive shall, subject to applicable securities laws, rules
and regulations, lapse on the Termination Date.
(d) Resignation. Executive shall have the right to terminate
this Agreement and his employment with the Company upon fourteen (14) calendar
days prior written notice to the Company. Except if the Executive's resignation
is for Good Reason in accordance with paragraph (b) above, from and after the
effective date of such resignation, Executive shall (i) have no right to receive
any further Salary or bonus hereunder; (ii) cease to be covered under or be
permitted to participate in any Benefits (except payments due the Executive or
the Executive's beneficiaries or representatives under any applicable pension,
profit sharing, life or disability insurance plans or policies); and (iii)
forfeit any and all non-vested options granted or non-vested Common Stock
purchased under the 1998 Plan.
(e) Definitions. For purposes of this Section 10 the terms
listed below shall mean the following:
(i) "Change in Control" shall mean:
(a) the direct or indirect acquisition, whether
by sale, merger, consolidation, or purchase of assets or stock, by any person,
corporation, or other entity or group thereof of the beneficial ownership (as
that term is used in Section 13(d)(l) of the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder) of shares in the
Company which, when added to any other shares the beneficial ownership of which
is held by the acquirer, shall result in the acquirer's having more that 33% of
the votes that are entitled to be cast at meetings of stockholders as to matters
on which all outstanding shares are entitled to be voted as a single class;
provided, however, that such acquisition shall not constitute a Change of
Control for purposes of this Agreement if prior to such acquisition a resolution
declaring that the acquisition shall not constitute a Change of Control is
adopted by the Board with the support of a majority of the Board members who
either were members of the Board for at least two years prior to the date of the
vote on such resolution or were nominated for election to the Board by at least
two-thirds of the Directors then still in office who were members of the Board
at least two years prior to the date of the vote on such resolution; and
provided further, that neither the Company, nor any person who as of the date
hereof was a Director or officer of the Company, nor any trustee or other
fiduciary holding securities under an employee benefit plan of the Company, nor
any corporation owned, directly or indirectly, by the shareholders of the
Company in the substantially the
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same proportions as their ownership of shares of the Company shall be deemed to
be an "acquirer" for purposes of this Section.
(b) the election during any two-year period to a
majority of the seats on the Board of Directors of the Company of individuals
who were not members of the Board at the beginning of such period unless such
additional or replacement directors were approved by at least 80% of the
continuing directors.
(c) shareholder approval of a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
(ii) "Good Reason" shall mean the occurrence of (a) a
material breach of this Agreement by the Company, (b) the assignment to the
Executive of duties inconsistent with his position as described in Section 2
herein, or any significant adverse alteration in the status or conditions of the
Executive's employment or in the nature of the Executive's responsibilities as
described in Section herein, (c) the failure of the Company to continue to
provide Executive with benefits substantially similar to those described in this
Agreement or to continue in effect any benefit or stock option plan which is
material to the Executive's compensation, including but not limited to the 1998
Plan, (d) the failure of the Company to maintain directors' and officers'
insurance at an aggregate amount at least equal to the level provided as of the
date hereof; provided, however, in the case of (a), (c) and (d) above, Executive
shall not be deemed to have Good Reason to terminate his employment if the
reason for such termination is remedied prior to the date of termination
specified in the notice of termination pursuant to Section 10(d) herein.
SECTION 11. AUTHORITY. Executive represents and warrants that he has the
ability to enter into this Agreement and perform all obligations hereunder, and
that there are no restrictions on Executive or any obligations owed by him third
parties which are reasonably likely, in any way, to detract from or adversely
affect his performance hereunder.
SECTION 12. MISCELLANEOUS.
(a) Separate Agreements. The covenants of Executive contained
in this Agreement shall survive any termination of this Agreement and shall be
construed as separate agreements independent of any other agreement, claim, or
cause of action of Executive against the Company, whether predicated on this
Agreement or otherwise. The covenants contained in this Agreement are necessary
to protect the legitimate business interests of the Company.
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(b) Entire Agreement. The parties hereto acknowledge and agree
that this Agreement supersedes all previous contracts and agreements between the
Company and Executive relating to the subject matter hereof and that any such
previous contracts or agreements shall become null and void upon execution of
this Agreement. This Agreement constitutes the complete agreement among the
parties hereto with respect to the subject matter hereof and no party has made
or is relying on any promises by any other party of their respective
representatives not contained in this Agreement.
(c) Severability. If any provision of this Agreement is held to
be illegal, invalid or unenforceable under present or future laws, such
provision shall be fully severable, this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of this Agreement, and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance from this
Agreement. If any provision of this Agreement is held to be unenforceable
because of the duration of such provision, the area covered thereby or the scope
of the activity restrained, the parties hereby expressly agree that the court
making such determination shall have the power to reduce the duration and/or
areas of such provision and/or the scope of the activity to be restrained
contained in such provision and, in its reduced form, such provision shall then
be enforceable.
(d) Successor and Assigns.
(i) This Agreement is personal in nature and neither
this Agreement nor any rights or obligations arising hereunder may be assigned,
transferred or pledged by Executive. This Agreement shall inure to the benefit
of and be enforceable by Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.
(ii) This Agreement shall be binding upon and inure to
the benefit of the Company and their successors. The rights and obligations of
the Company pursuant to this Agreement are freely assignable and transferable by
Company without the consent of Executive without his being relived of any
obligations hereunder, including, without limitation, an assignment or transfer
in connection with a merger or consolidation of the Company, or a sale or
transfer of all or substantially all of the assets of the Company; provided, the
provisions of this Agreement shall be binding on and shall inure to the benefit
of the surviving business entity or the business entity to which such assets
shall be transferred and such successor shall expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such transaction had taken place.
(e) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the conflict of law rules thereof.
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(f) Amendment. No amendment, waiver, modification or change of
an provision of this Agreement shall be valid unless in writing and signed by
both parties; provided, that any such amendment, waiver, modification or change
must be consented to on behalf of the Company by the Board. The waiver of any
breach of any duty, term or condition of this Agreement shall not be deemed to
constitute a waiver of any preceding or succeeding breach of the same or any
other duty, term or condition of this Agreement.
(g) Notices. All notices and communications under this
Agreement shall be in writing and shall be personally delivered or sent by
prepaid certified mail, return receipt requested, or by recognized courier
service, and addressed as follows:
(i) If to the Company to:
American Bank Note Holographics, Inc.
399 Executive Boulevard
Elmsford, NY 10523
Attention: President
Telephone: (914) 592-2355
Facsimile: (914) 592-4469
With a copy to:
Fulbright & Jaworski LLP
666 Fifth Avenue
New York, NY 10103
Attention: Paul Jacobs, Esq.
Telephone: (212) 318-6348
Facsimile: (212) 752-5958
(iii) If to the Executive to:
Salvatore F. D'Amato
18 Meadow Avenue
Monmouth Beach, NJ 07750
Telephone: (732) 222-0634
Facsimile: (732) 728-1013
With a copy to:
Edwin T. Markham
Satterlee Stephens Burke & Burke LLP
230 Park Avenue
11th Floor
New York, NY 10169
Telephone: (212) 818-9200
Facsimile: (212) 818-9606
or to such other address as may be specified by notice of the parties.
(h) Arbitration. Except as provided for in Section 7(b), the
Company and Executive agree that any claim or controversy arising out of or
relating to this Agreement or any breach thereof ("Arbitrable Dispute") shall be
settled by arbitration if such claim or controversy is not otherwise settled;
provided, however, that nothing set forth herein shall in any way limit the
Company's ability to seek and obtain injunctive relief in aid of arbitration
from any court of competent jurisdiction. This arbitration agreement applies to,
among others, disputes about the validity, interpretation,
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or effect of this Agreement. The arbitration shall take place in New York, New
York, or such other location as to which the parties may mutually agree. Except
as expressly set forth herein, all arbitration proceedings under this Section
12(h) shall be undertaken in accordance with the Commercial Arbitration Rules of
the American Arbitration Association (the "AAA") then in force only before
individuals who are (i) lawyers engaged full-time in the practice of law and
(ii) on the AAA register of arbitrators. There shall be one arbitrator who shall
be chosen in accordance with the rules of the AAA. The arbitrator may not modify
or change this Agreement in any way and shall not be empowered to award punitive
damages against any party to such arbitration. Each party shall pay the fees of
such party's attorneys, the expenses of such party's witnesses, and any other
expenses that such party incurs in connection with the arbitration, but all
other costs of the arbitration, including the fees of the arbitrator, the cost
of any record or transcript of the arbitration, administrative fees, and other
fees and costs shall be paid in equal shares by Executive and the Company.
Except as provided for in Section 7(b), arbitration in this manner shall be the
exclusive remedy for any Arbitrable Dispute. Should Executive or the Company
attempt to resolve an Arbitrable Dispute by any method other than arbitration
pursuant to this Section, the responding party will be entitled to recover from
the initiating party all damages, expenses, and attorneys' fees incurred as a
result of that breach.
(i) Indemnification Agreement. A material breach of that
certain Indemnification Agreement, entered into as of the date hereof, between
the Company and the Executive, shall constitute a material breach of this
Agreement.
(j) Attorneys' Fees. The Company will pay or promptly reimburse
the Executive for all reasonable attorneys' fees, up to a maximum amount of
$5,000, incurred by Executive in the preparation, negotiation, execution and
delivery of this Agreement upon presentation to the Board of appropriate
supporting documentation.
(k) Counterparts. This Agreement may be executed in
counterparts, each of which will be deemed an original but all of which will
together constitute one and the same Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
By: /s/ KENNETH TRAUB
----------------------------------
Name: Kenneth Traub
Title: President
SALVATORE F. D'AMATO
/s/ SALVATORE F. D'AMATO
--------------------------------------
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Exhibit 10.12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, (this "Agreement"), is made and entered
into as of February 3, 1999, by and between Kenneth Traub (the "Executive") and
American Bank Note Holographics, Inc., a Delaware corporation (the "Company").
RECITAL
WHEREAS, the Executive has been acting as a consultant to the
Company since December 28, 1998;
WHEREAS, in light of recent events which are generally described
in the Company's recent press releases of January 19, 1999, January 25, 1999,
and February 1, 1999, the Company desires to formally retain the Executive to
render executive and managerial services and the Executive desires to render
such services; and
WHEREAS, the Company and the Executive desire to set forth herein
the terms and conditions on which the Company will employ the Executive, and the
Executive will accept employment with the Company.
AGREEMENT
NOW THEREFORE, in consideration of the mutual promises set forth
in this Agreement and intending to be legally bound, Executive and the Company
agree as follows:
SECTION 1. EMPLOYMENT. The Company hereby employs Executive and Executive
hereby accepts such employment and agrees to render services to the Company,
upon the terms and conditions set forth in this Agreement.
SECTION 2. POSITION AND DUTIES. Executive shall assume the responsibilities
and perform the duties of President and Chief Operating Officer of the Company.
The Executive shall also serve in such similar capacities as may be assigned to
him in good faith from time to time by the Board of Directors of the Company
(the "Board"). Executive agrees to devote substantially all of his business
time, attention, skill and best efforts to the diligent performance of his
duties hereunder and shall be loyal to the Company and its affiliates and
subsidiaries, and use his best efforts to further their interests. The Executive
shall be responsible for the day to day nationwide general management,
administration and operation
<PAGE> 2
of all present and future business of the Company, including, without
limitation, those operations set forth in the By-laws of the Company. The
actions of the Executive shall be subject to review only by the Board. In the
event that the Executive shall deem it necessary to consult the entire Board
regarding the performance of his duties, the Executive shall report directly to
the Board and shall not be required to seek the approval of any other officer or
individual director to do so. In the performance of his duties, Executive agrees
to abide by and comply with all policies, practices, handbooks, procedures and
guidelines which are now in effect or which the Company may adopt, modify,
supplement or change from time to time.
SECTION 3. TERM OF EMPLOYMENT. The term of employment hereunder shall
commence on the date hereof and shall continue thereafter until the earlier of
(i) one year from the date hereof or (ii) termination pursuant to Section 10
hereof (the "Employment Term"). This Agreement shall be automatically renewed
annually for successive one year terms, unless the Company gives written notice
at least sixty (60) days prior to the end of the Employment Term of its election
to terminate such employment at the end of such Employment Term. Notwithstanding
the foregoing, if the Executive's employment is terminated pursuant to Section
10 of this agreement, the automatic renewal provided herein shall be of no
further effect as of the Termination Date (as defined). In the event Executive's
employment is not renewed at the end of the Employment Term (except as otherwise
provided in Section 10 hereof) or renewal term, the Company will pay to the
Executive an amount equal to the Salary and Bonus (both, as defined) of the
Executive for the prior year.
SECTION 4. EXCLUSIVITY. During the term of Executive's employment with the
Company, Executive shall not without the prior written consent of the Board (i)
perform any managerial, sales, marketing or technical services directly or
indirectly for any person or entity competing directly or indirectly with the
Company or any of its subsidiaries in the holography business; (ii) perform any
such services for any entity owned, directly or indirectly, by anyone competing,
either directly or indirectly, with the Company or any of its subsidiaries in
the holography business; (iii) on his own behalf or that of any other person or
entity, compete, either directly or indirectly, with the Company or any of its
subsidiaries, to sell any products or services marketed or offered by the
Company or any of its subsidiaries; (iv) engage or become interested, directly
or indirectly, as owner, employer, partner, consultant, through stock ownership
(except ownership of less than one percent of the number of shares outstanding
of any securities which are listed for trading on any securities exchange,
Provided that the specific nature and amount of the investment, if over $50,000,
shall be immediately disclosed to the Company in writing), investment of
capital, lending of money or property, or otherwise either alone or in
association with others, in the operation of any type of business or enterprise
which conflicts or interferes with the
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performance of Executive's services hereunder or (v) engage in any activities
which could reasonably be deemed to be a conflict of interest with his duties
hereunder or his obligations to the Company.
SECTION 5. COMPENSATION AND BENEFITS.
(a) Salary and Bonus. As compensation for the performance of
the Executive's services hereunder, during the Employment Term, the Company will
pay to the Executive an annual base salary of $250,000 per annum; provided that
the Executive's annual base salary shall be increased by not less than 3% per
annum in the event this Agreement is renewed pursuant to Section 3 above (the
"Salary"). Within 30 days following the end of each of the Company's fiscal
quarters, the Board shall determine if the Executive is eligible to receive a
bonus (the "Bonus"). While the payment of any Bonus (or no Bonus) shall be
determined by the Board or a committee designated by the Board to make such
determination (the "Compensation Committee") in its sole discretion, and shall
be based on certain performance measures which shall be determined by the Board
or the Compensation Committee in its sole discretion, the parties agree that a
target bonus of $25,000 per quarter would be appropriate. The Executive's Salary
and any Bonus will be payable in accordance with the customary payroll practices
of the Company for its senior management personnel.
(b) Benefits. During the Employment Term, the Executive shall
be eligible to participate, on the same basis and subject to the same
qualifications as other senior management personnel of the Company, in any
pension, profit sharing, savings, bonus, life insurance, health insurance,
hospitalization, dental, drug prescription, disability, accidental death and
dismemberment and other benefit plans and policies as may from time to time be
in effect with respect to senior management personnel of the Company
(collectively, the "Benefits"). The Executive shall also be entitled to vacation
days (including the right to accrue unused vacation time from year to year if
the Agreement is renewed pursuant to Section 3 above), holidays and sick days in
accordance with the policies of the Company as may be in effect from time to
time; provided, however, that termination of Executive's employment for any
reason (including resignation by the Executive), the Company shall pay Executive
for accrued vacation time unused as of the last date of employment, on a pro
rated basis calculated on the basis of the Executive's Salary and Bonus in
effect on the Termination Date. Upon mutual agreement of the Company and the
Executive that it would be beneficial to both parties for the Executive to
relocate his personal residence in connection with his employment hereunder, the
Company shall reimburse the Executive for the reasonable expenses related to
such relocation upon the submission of supporting documentation for such
expenses.
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(c) Stock Options. As additional compensation hereunder, the
Executive shall be granted stock options to purchase up to 250,000 shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"), pursuant
to the Company's 1998 Stock Incentive Plan (the "1998 Plan"), at an exercise
price equal to the closing market price of the Common Stock on the last date on
which the New York Stock Exchange was open for trading immediately prior to the
date hereof. The options and any shares of Common Stock underlying the options
may be subject to certain restrictions as disclosed in the 1998 Plan (the
"Restricted Stock"). Subsequent grants of options to purchase equity in the
Company during the Employment Term will be made at the sole discretion of the
Board or the Compensation Committee. The Company will use reasonable efforts to
file a registration statement on Form S-8 under the Securities Act of 1933, as
amended, to register all shares of Common Stock issued to the Executive under
the 1998 Plan.
(d) Expenses. The Company will pay or promptly reimburse the
Executive for all reasonable out-of-pocket business, entertainment and travel
expenses incurred by the Executive in the performance of his duties hereunder
upon presentation of appropriate supporting documentation and otherwise in
accordance with the expense reimbursement policies of the Company in effect from
time to time.
(e) Taxes and Withholdings. All appropriate deductions,
including federal, state and local taxes and social security, shall be deducted
from any amount paid by the Company to the Executive hereunder in conformity
with applicable laws.
SECTION 6. CONFIDENTIALITY. The Executive acknowledges and agrees that (a) in
connection with his employment by the Company, the Executive will be involved in
the Company's and its subsidiaries' (if any) operations; (b) in order to permit
him to carry out his responsibilities, the Company may disclose, to the
Executive, in strict confidence, or the Executive may develop, confidential
proprietary information and trade secrets of the Company and its affiliates,
including without limitation (i) unpublished information with respect to the
Company concerning marketing or sales plans, operational techniques, strategic
plans and the identity of suppliers and supply contacts; (ii) unpublished
financial information with respect to the Company, including information
concerning revenues, profits and profit margins; (iii) internal confidential
manuals and memos; and (iv) "material inside information" as such phrase is used
for purposes of the Securities Exchange Act of 1934, as amended (collectively,
"Confidential Information"); and (c) the Company and its affiliates derive
significant economic value and competitive advantage by reason of the fact that
such Confidential Information, in whole or in part, is not generally known or
readily ascertainable by the Company's or its affiliates' actual or potential
competitors and, as such, constitutes the Company's and its affiliates' valuable
trade secrets.
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In addition to any obligations set forth herein, and in
recognition of the foregoing acknowledgments, for himself and on behalf of his
affiliates, the Executive agrees that he will not, directly or indirectly, use,
disseminate or disclose, any Confidential Information (other than for the
legitimate business purposes of the Company), and that he will not knowingly
permit any of his affiliates to, directly or indirectly, use, disseminate or
disclose, any Confidential Information. At the end of the Employment Term, the
Executive agrees to deliver immediately to the Company the originals and all
copies of Confidential Information in his possession or control, whether in
written form, on computers or discs or otherwise.
The restrictions set forth in this Section 6 shall not apply to
those particular portions of Confidential Information, if any, that (a) have
been published by any of the Company or any of its affiliates in a patent,
article or other similar tangible publication or (b) become available to the
Executive from a source other than the Company, provided that the source of such
Confidential Information was not known by the Executive, after reasonable
inquiry, to be bound by a confidentiality agreement with or other obligation of
confidentiality to the Company or any of its affiliates.
The foregoing restrictions on the disclosure of Confidential
Information set forth in this Section 6 shall not apply to those particular
portions of Confidential Information, if any, that are required to be disclosed
in connection with any legal process; provided that, at least ten (10) days in
advance of any required disclosure, or such lesser time as may be required by
circumstances, the Executive shall furnish the Company with a copy of the
judicial or administrative order requiring that such information be disclosed
together with a written description of the information proposed to be disclosed
(which description shall be in sufficient detail to enable the Executive and its
affiliates to determine the nature and scope of the information proposed to be
disclosed), and the Executive covenants and agrees to cooperate with the Company
and its affiliates to deliver the minimum amount of information necessary to
comply with such order.
This Section 6 shall survive any termination of this Agreement.
SECTION 7. COVENANT NOT TO COMPETE.
(a) Scope. In order to fully protect the Company's Confidential
Information, during the Employment Term and for a period of one year thereafter
(the "Noncompetition Period"), the Executive shall not, except as authorized in
writing by the Board, directly or indirectly, render services to, assist,
participate in the affairs of, or otherwise be connected with, any person or
enterprise (other than the Company and its subsidiaries, if
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any), which person or enterprise is engaged in, or is planning to engage in, and
shall not personally engage in, any business that is competitive with the
business of the Company or any of its subsidiaries, if any, with respect to any
products or services of the Company or any of its subsidiaries, if any, in any
capacity which would utilize the Executive's services with respect to any
products or services of the Company or any of its subsidiaries, if any, that
were within the Executive's management responsibility at any time within the
twelve (12) month period immediately prior to the Termination Date.
(b) Remedies. The parties recognize, acknowledge and agree that
(i) any breach or threatened breach of the provisions of this Section 7 shall
cause irreparable harm and injury to the Company and that money damages will not
provide an adequate remedy for such breach or threatened breach and (ii) the
duration, scope and geographical application of this Agreement are fair and
reasonable under the circumstances, and are reasonably required to protect the
legitimate business interests of the Company. Accordingly, Executive agrees that
the Company shall be entitled to have the provisions of this Agreement
specifically enforced by any court having jurisdiction, and that such a court
may issue a temporary restraining order, preliminary injunction or other
appropriate equitable relief, without having to prove the inadequacy of
available remedies at law. In addition, the Company shall be entitled to avail
itself of all such other actions and remedies available to it or any of its
affiliates under law or in equity and shall be entitled to such damages as it
sustains by reason of such breach or threatened breach. It is the express desire
and intent of the parties that the provisions of this Agreement be enforced to
the full extent possible.
(c) Severability. If any provision of Section 7(a) is held to
be unenforceable because of the duration of such provision, the area covered
thereby or the scope of the activity restrained, the parties hereby expressly
agree that the court making such determination shall have the power to reduce
the duration and/or areas of such provision and/or the scope of the activity to
be restrained contained in such provision and, in its reduced form, such
provision shall then be enforceable. The parties hereto intend and agree that
the covenants contained in Section 7(a) shall be construed as a series of
separate covenants, one for each municipality, community or county included
within the area designated by Section 7(a). Except for geographic coverage, the
terms and conditions of each such separate covenant shall be deemed identical to
the covenant contained in Section 7(a). Furthermore, if any court shall refuse
to enforce any of the separate covenants deemed included in Section 7(a), then
such unenforceable covenant shall be deemed eliminated from the provisions
hereof to the extent necessary to permit the remaining separate covenants to be
enforced in accordance with their terms. The prevailing party in any action
arising out of a dispute in respect of any provision of this Agreement shall be
entitled to recover from the
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non-prevailing party reasonable attorneys' fees and costs and disbursements
incurred in connection with the prosecution or defense, as the case may be, of
any such action.
SECTION 8. RESPONSIBILITY UPON TERMINATION. Upon the termination of his
employment for any reason and irrespective of whether or not such termination is
voluntary on his part:
(a) The Executive shall advise the Company of the identity of
his new employer within ten (10) days after accepting new employment and further
agrees to keep the Company so advised of any change in employment during the
Non-competition Period;
(b) The Company in its sole discretion may notify any new
employer of the Executive that he has an obligation not to compete with the
Company during the Noncompetition Period; and
(c) The Executive shall deliver to the Company any and all
records, forms, contracts, memoranda, work papers, customer data and any other
documents (whether in written form, on computers or discs or otherwise) which
have come into his possession by reason of his employment with the Company,
irrespective of whether or not any of said documents were prepared for him, and
he shall not retain memoranda in respect of or copies of any of said documents.
SECTION 9. NONSOLICITATION. The Executive agrees that during the term of his
employment with the Company and for a period of twelve (12) months thereafter,
he will not, and will not assist any of his affiliates to, directly or
indirectly, recruit or otherwise solicit or induce any executive, customer,
subscriber or supplier of the Company or any of its subsidiaries about whom or
which he gained Confidential Information while at the Company to terminate its
employment or arrangement with the Company or any of its subsidiaries, otherwise
change its relationship with the Company or any of its subsidiaries, or
establish any relationship with the Executive or any of his affiliates for any
business purpose deemed materially competitive with the business of the Company
or any of its subsidiaries, if any.
SECTION 10. TERMINATION.
(a) Termination for Cause. Notwithstanding anything contained
herein to the contrary, the Board may terminate the Executive's employment with
the Company for cause; provided that the Executive shall be given notice of the
Company's intent to terminate his employment for cause, the nature of the cause
and, if cureable, a reasonable opportunity to remedy the cause. For the purposes
of this Section 10(a), the term "reasonable" shall mean
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that amount of time deemed reasonable by the Board acting in good faith and in
light of the nature of the cause. For purposes of this Agreement, the term
"cause" shall mean, the occurrence of any one or more of the following (i) the
commission of any act of willful and material embezzlement or fraud on the part
of Executive against the Company, (ii) any act or omission which constitutes a
willful and material breach by Executive of this Agreement, including a refusal
or failure by Executive to perform his duties and obligations hereunder, (iii)
Executive has been convicted of a crime, which conviction has, or is reasonably
likely to have a material adverse effect on the Company, or its business or will
prevent the Executive from performing his duties for a sustained period of time,
(iv) Executive becomes Disabled (as hereinafter defined), or (v) the death of
Executive; provided, however, that "cause" shall not include any act or omission
by the Executive undertaken in the good faith exercise of the Executive's
business judgment as President and Chief Operating Officer or in good faith
reliance on the advice of counsel. For purposes of this Agreement, "Disabled"
shall mean Executive's inability, due to illness, accident or any other physical
or mental condition, to fully perform the essential functions of his position or
this Agreement for more than 26 weeks consecutively or for intermittent periods
aggregating 39 weeks during any 78-week period during the Employment term,
except as otherwise required by law.
If, during the Employment Term the Company terminates the
Executive's employment pursuant to clauses (i), (ii) or (iii) of this paragraph
(a), then, from and after the date the Executive's termination is effective (the
"Termination Date"), the Executive shall (a) have no right to receive any
further Salary following the Termination Date, (b) be entitled to receive any
Bonus, payable on a pro rata basis, which may have accrued or which otherwise
would have been granted by the Board had the Executive not been terminated, for
the year in which the Executive was terminated (c) cease to be covered under or
be permitted to participate in any Benefits (except payments due to the
Executive or the Executive's beneficiaries or representatives under any
applicable life or disability insurance plans or policies) and (d) shall have no
further right to purchase shares of Common Stock pursuant to the 1998 Plan;
provided however, that all restrictions on Restricted Stock purchased by the
Executive shall, subject to applicable securities laws, rules and regulations,
lapse on the Termination Date.
If during the Employment Term the Company terminates the Executive
employment pursuant to clause (iv) or (v) of this paragraph (a), (a) the Company
shall continue to pay the Executive (or his beneficiaries, as applicable) Salary
then in effect, for a period of one year following the Termination Date in
accordance with the customary payroll practices of the Company for its senior
management personnel, (b) the Executive shall be entitled to receive any Bonus,
payable on a pro rata basis, which may have accrued or which otherwise would
have been granted by the Board had the Executive not been
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terminated, for the year in which the Executive was terminated, and (c) the
Executive shall be entitled to all rights with respect to any options granted or
Common Stock purchased under the 1998 Plan for a period of two years following
the Termination Date and all restrictions on Restricted Stock purchased by the
Executive shall, subject to applicable securities laws, rules and regulations,
lapse on the Termination Date.
(b) Termination Without Cause and Resignation For Good Reason.
The Company shall have the right to terminate this Agreement and the employment
of Executive with the Company for any reason or no reason and without cause upon
written notice to Executive of such termination, and the Executive shall have
the right to resign for Good Reason (as hereinafter defined); provided that,
except as otherwise provided in paragraph (c) below, (i) the Company shall
continue to pay to the Executive the Salary then in effect, together with any
Bonus which may have accrued or which otherwise would have been granted by the
Board had the Executive not been terminated or resigned for two years following
the Termination Date, in accordance with the customary payroll practices of the
Company for its senior management personnel (except in the event the Executive
resigns for Good Reason as defined in paragraph (e)(ii)(d) below, in which case
the amount otherwise payable under this clause (i) will be reduced by 50%), (ii)
the Company shall continue any benefits in which the Executive then participates
on the same basis of participation and subject to all terms and conditions of
such plans as applied prior to such termination or resignation, and (iii) all
non-vested options to purchase shares of Common Stock granted under the 1998
Plan shall vest on the Termination Date and the Executive shall be entitled to
all rights with respect to such options or Common Stock purchased under the 1998
Plan for a period of two years following the Termination Date. All restrictions
on Restricted Stock purchased by the Executive shall, subject to applicable
securities laws, rules and regulations, lapse on the Termination Date.
(c) Termination Upon Change of Control or Resignation for Good
Reason Following a Change of Control. In the event Executive's employment is
terminated by the Company subsequent to a Change of Control (as hereinafter
defined) or the Executive resigns from the Company for Good Reason (as
hereinafter defined) within one year following a Change of Control, the Company
will pay the Executive a severance amount equal to the product of (x) the Salary
multiplied by (y) two (2). In the event Executive's employment is terminated by
the Company subsequent to a Change of Control (as hereinafter defined) or the
Executive resigns from the Company for Good Reason (as hereinafter defined) at
any time after one year following a Change of Control, the Company will pay the
Executive a severance amount equal to the product of (x) the Salary multiplied
by (y) three (3). If a payment is made to the Executive pursuant to this
paragraph (c), in no event shall the Executive receive any payments pursuant
paragraph (b) of this Section 10. To the extent
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that such amounts are in excess of the amount allowable as a deduction under
Section 280(G) of the Code, or are subject to excise tax pursuant to Section
4999 of the Code, the Company will gross-up any additional amounts due, and
(iii) all non-vested options to purchase shares of Common Stock granted under
the 1998 Plan shall vest on the Termination Date and all restrictions on
Restricted Stock purchased by the Executive shall, subject to applicable
securities laws, rules and regulations, lapse on the Termination Date.
(d) Resignation. Executive shall have the right to terminate
this Agreement and his employment with the Company upon fourteen (14) calendar
days prior written notice to the Company. Except if the Executive's resignation
is for Good Reason in accordance with paragraphs (b) and (c) above, from and
after the effective date of such resignation, Executive shall (i) have no right
to receive any further Salary or bonus hereunder; (ii) cease to be covered under
or by permitted to participate in any Benefits (except payments due the
Executive or the Executive's beneficiaries or representatives under any
applicable pension, profit sharing, life or disability insurance plans or
policies); and (iii) forfeit any and all non-vested options granted or
non-vested Common Stock purchased under the 1998 Plan.
(e) Definitions. For purposes of this Section 10 the terms
listed below shall mean the following:
(i) "Change in Control" shall mean:
(a) the direct or indirect acquisition, whether by sale,
merger, consolidation, or purchase of assets or stock, by any person,
corporation, or other entity or group thereof of the beneficial ownership
(as that term is used in Section 13(d)(l) of the Securities Exchange Act
of 1934, as amended, and the rules and regulations promulgated
thereunder) of shares in the Company which, when added to any other
shares the beneficial ownership of which is held by the acquiror, shall
result in the acquirer's having more than 33% of the votes that are
entitled to be cast at meetings of stockholders as to matters on which
all outstanding shares are entitled to be voted as a single class;
provided, however, that such acquisition shall not constitute a Change of
Control for purposes of this Agreement if prior to such acquisition a
resolution declaring that the acquisition shall not constitute a Change
of Control is adopted by the Board with the support of a majority of the
Board members who either were members of the Board for at least two years
prior to the date of the vote on such resolution or were nominated for
election to the Board by at least two-thirds of the directors then still
in office who were members of the Board at least two years prior to the
date of the vote on such resolution; and provided
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further, that neither the Company, nor any person who as of the date
hereof was a director or officer of the Company, nor any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company, nor any corporation owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportions as
their ownership of shares of the Company shall be deemed to be an
"acquirer" for purposes of this Section.
(b) the election during any two-year period to a majority of
the seats on the Board of Directors of the Company of individuals who
were not members of the Board at the beginning of such period unless such
additional or replacement directors were approved by at least 80% of the
continuing directors.
(c) shareholder approval of a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company of
all or substantially all of the Company's assets.
(ii) "Good Reason" shall mean the occurrence of (a) a material
breach of this Agreement by the Company, (b) the assignment to the
Executive of duties inconsistent with his position as described in
Section 2 herein, or any significant adverse alteration in the status or
conditions of the Executive's employment or in the nature of the
Executive's responsibilities as described in Section 2 herein, (c) the
failure of the Company to continue to provide Executive with benefits
substantially similar to those described in this Agreement or to continue
in effect any benefit or stock option plan which is material to the
Executive's compensation, including but not limited to, the 1998 Plan or
(d) the failure of the Company to maintain directors' and officers'
insurance at an aggregate amount at least equal to the level provided as
of the date hereof; provided, however, in the case of (a), (c) and (d)
above, Executive shall not be deemed to have Good Reason to terminate his
employment if the reason for such termination is remedied prior to the
date of termination specified in the notice of termination pursuant to
Section 10(d) herein.
SECTION 11. AUTHORITY. Executive represents and warrants that he has the
ability to enter into this Agreement and perform all obligations hereunder, and
that there are no restrictions on Executive or any obligations owed by him to
third parties which are reasonably likely, in any way, to detract from or
adversely affect his performance hereunder.
SECTION 12. MISCELLANEOUS.
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(a) Separate Agreements. The covenants of Executive contained
in this Agreement shall survive any termination of this Agreement and shall be
construed as separate agreements independent of any other agreement, claim, or
cause of action of Executive against the Company, whether predicated on this
Agreement or otherwise. The covenants contained in this Agreement are necessary
to protect the legitimate business interests of the Company.
(b) Entire Agreement. The parties hereto acknowledge and agree
that this Agreement supersedes all previous contracts and agreements between the
Company and Executive relating to the subject matter hereof and that any such
previous contracts or agreements shall become null and void upon execution of
this Agreement. This Agreement constitutes the complete agreement among the
parties hereto with respect to the subject matter hereof and no party has made
or is relying on any promises by any other party or their respective
representatives not contained in this Agreement.
(c) Severability. If any provision of this Agreement is held to
be illegal, invalid or unenforceable under present or future laws, such
provision shall be fully severable, this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of this Agreement, and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance from this
Agreement. If any provision of this Agreement is held to be unenforceable
because of the duration of such provision, the area covered thereby or the scope
of the activity restrained, the parties hereby expressly agree that the court
making such determination shall have the power to reduce the duration and/or
areas of such provision and/or the scope of the activity to be restrained
contained in such provision and, in its reduced form, such provision shall then
be enforceable.
(d) Successor and Assigns.
(i) This Agreement is personal in nature and neither
this Agreement nor any rights or obligations arising hereunder may be assigned,
transferred or pledged by Executive. This Agreement shall inure to the benefit
of and be enforceable by Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.
(ii) This Agreement shall be binding upon and inure to
the benefit of the Company and their successors. The rights and obligations of
the Company pursuant to this Agreement are freely assignable and transferable by
Company without the consent of Executive without his being relieved of any
obligations hereunder, including, without
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limitation, an assignment or transfer in connection with a merger or
consolidation of the Company, or a sale or transfer of all or substantially all
of the assets of the Company; provided, the provisions of this Agreement shall
be binding on and shall inure to the benefit of the surviving business entity or
the business entity to which such assets shall be transferred and such successor
shall expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform it if no
such transaction had taken place.
(e) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the conflict of law rules thereof.
(f) Amendment. No amendment, waiver, modification or change of
any provision of this Agreement shall be valid unless in writing and signed by
both parties; provided, that any such amendment, waiver, modification or change
must be consented to on behalf of the Company by the Board. The waiver of any
breach of any duty, term or condition of this Agreement shall not be deemed to
constitute a waiver of any preceding or succeeding breach of the same or any
other duty, term or condition of this Agreement.
(g) Notices. All notices and communications under this
Agreement shall be in writing and shall be personally delivered or sent by
prepaid certified mail, return receipt requested, or by recognized courier
service, and addressed as follows:
(i) If to the Company to:
American Bank Note Holographics, Inc.
399 Executive Boulevard
Elmsford, NY 10523
Attention: Chief Executive Officer
Telephone: (212) 593-5700
Facsimile: (212) 593-9683
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue
New York, NY 10022
Attention: Daniel Bergstein, Esq.
Telephone: (212)318-6000
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Facsimile: (212) 319-4090
(ii) If to the Executive to:
Kenneth Traub
18 Sleepy Hollow Lane
Princeton Junction, NJ 08550
Telephone: (609) 716-6101
Facsimile: (609) 716-1452
or to such other address as may be specified by notice of the parties.
(h) Arbitration. Except as provided for in Section 7(b), the
Company and Executive agree that any claim or controversy arising out of or
relating to this Agreement or any breach thereof ("Arbitrable Dispute") shall be
settled by arbitration if such claim or controversy is not otherwise settled;
provided, however that nothing set forth herein shall in any way limit the
Company's ability to seek and obtain injunctive relief in aid of arbitration
from any court of competent jurisdiction. This arbitration agreement applies
to, among others, disputes about the validity, interpretation, or effect of
this Agreement. The arbitration shall take place in New York, New York, or such
other location as to which the parties may mutually agree. Except as expressly
set forth herein, all arbitration proceedings under this Section 12(h) shall be
undertaken in accordance with the Commercial Arbitration Rules of the American
Arbitration Association (the "AAA") then in force only before individuals who
are (i) lawyers engaged full-time in the practice of law and (ii) on the AAA
register of arbitrators. There shall be one arbitrator who shall be chosen in
accordance with the rules of the AAA. The arbitrator may not modify or change
this Agreement in any way and shall not be empowered to award punitive damages
against any party to such arbitration. Each party shall pay the fees of such
party's attorneys, the expenses of such party's witnesses, and any other
expenses that such party incurs in connection with the arbitration, but all
other costs of the arbitration, including the fees of the arbitrator, the cost
of any record or transcript of the arbitration, administrative fees, and other
fees and costs shall be paid in equal shares by Executive and the Company.
Except as provided for in Section 7(b), arbitration in this manner shall be the
exclusive remedy for any Arbitrable Dispute. Should Executive or the Company
attempt to resolve an Arbitrable Dispute by any method other than arbitration
pursuant to this Section, the responding party will be entitled to recover from
the initiating party all damages, expenses, and attorneys' fees incurred as a
result of that breach.
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(i) Indemnification Agreement. A material breach of that
certain indemnification agreement, entered into as of the date hereof, between
the Company and the Executive, shall constitute a material breach of this
Agreement.
(j) Attorneys Fees. The Company will pay or promptly
reimburse the Executive for all reasonable attorneys fees, up to a maximum
amount of $5,000, incurred by Executive in the preparation, negotiation,
execution and delivery of this Agreement upon presentation to the Board of
appropriate supporting documentation.
(k) Counterparts. This Agreement may be executed in
counterparts, each of which will be deemed an original but all of which will
together constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
/s/ MORRIS WEISSMAN
By: ___________________________________
Name: Morris Weissman
Title: Chairman and CEO
KENNEITH TRAUB
/s/ Kenneth Traub
_______________________________________
<PAGE> 1
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, (this "Agreement"), is made and entered into
as of May 11, 1999, by and between Alan Goldstein (the "Executive") and American
Bank Note Holographics, Inc., a Delaware corporation (the "Company").
R E C I T A L
WHEREAS, the Executive has been acting as a consultant to the Company
since February 1, 1999;
WHEREAS, the Company and the Executive desire to set forth herein the
terms and conditions on which the Company will employ the Executive, and the
Executive will accept employment with the Company.
AGREEMENT
NOW THEREFORE, in consideration of the mutual promises set forth in
this Agreement and intending to be legally bound, Executive and the Company
agree as follows:
SECTION 1. EMPLOYMENT. The Company hereby employs Executive and Executive hereby
accepts such employment and agrees to render services to the Company, upon the
terms and conditions set forth in this Agreement.
SECTION 2. POSITION AND DUTIES. Executive shall assume the responsibilities and
perform the duties of Chief Financial Officer and Secretary of the Company. The
Executive shall also serve in such similar capacities as may be assigned to him
in good faith from time to time by the President of the Company. Executive
agrees to devote substantially all of his business time, attention, skill and
best efforts to the diligent performance of his duties hereunder and shall be
loyal to the Company and its affiliates and subsidiaries, and use his best
efforts to further their interests. The Executive shall be responsible for the
financial management and financial reporting of the Company. In the performance
of his duties, Executive agrees to abide by and comply with all policies,
practices, handbooks, procedures and guidelines which are now in effect or which
the Company may adopt, modify, supplement or change from time to time.
SECTION 3. TERM OF EMPLOYMENT. The term of employment hereunder shall commence
on the date hereof and shall continue thereafter until the earlier of (i) one
year from the date hereof or (ii) termination pursuant to Section 10 hereof (the
"Employment Term"). This Agreement shall be automatically renewed annually for
successive one year terms, unless the Company gives written notice at least
sixty (60) days prior to the end of the Employment Term of its election to
terminate such employment at the end of such Employment Term. Notwithstanding
the foregoing, if the Executive's employment is terminated pursuant to Section
10 of this agreement, the automatic renewal provided
<PAGE> 2
herein shall be of no further effect as of the Termination Date (as defined). In
the event Executive's employment is not renewed at the end of the Employment
Term (except as otherwise provided in Section 10 hereof) or renewal term, the
Company will pay to the Executive an amount equal to the Executive's then
existing Salary and Bonus for the next six (6) months.
SECTION 4. EXCLUSIVITY. During the term of Executive's employment with the
Company, Executive shall not without the prior written consent of the Board of
Directors (i) perform any managerial, sales, marketing or technical services
directly or indirectly for any person or entity competing directly or indirectly
with the Company or any of its subsidiaries in the holography business; (ii)
perform any such services for any entity owned, directly or indirectly, by
anyone competing, either directly or indirectly, with the Company or any of its
subsidiaries in the holography business; (iii) on his own behalf or that of any
other person or entity, compete, either directly or indirectly, with the Company
or any of its subsidiaries, to sell any products or services marketed or offered
by the Company or any of its subsidiaries; (iv) engage or become interested,
directly or indirectly, as owner, employer, partner, consultant, through stock
ownership (except ownership of less than one percent of the number of shares
outstanding of any securities which are listed for trading on any securities
exchange, provided that the specific nature and amount of the investment, if
over $50,000 shall be immediately disclosed to the Company in writing),
investment of capital, lending of money or property, or otherwise either alone
or in association with others, in the operation of any type of business or
enterprise which conflicts or interferes with the performance of Executive's
services hereunder or (v) engage in any activities which could reasonably be
deemed to be a conflict of interest with his duties hereunder or his obligations
to the Company.
SECTION 5. COMPENSATION AND BENEFITS.
(a) Salary and Bonus. As compensation for the performance of the
Executive's services hereunder, during the Employment Term, the Company will pay
to the Executive an annual base salary of $160,000 per annum; provided that the
Executive's annual base salary shall be increased by not less than 3% per annum
in the event this Agreement is renewed pursuant to Section 3 above (the
"Salary"). Within 30 days following the end of each of the Company's fiscal
quarters, the President and Board shall determine if the Executive is eligible
to receive a bonus (the "Bonus). While the payment of any Bonus (or no Bonus)
shall be determined by the President and the Board or a committee designated by
the President and the Board to make such determination (the "Compensation
Committee") in its sole discretion, and shall be based on certain performance
measures which shall be determined by the Board or the Compensation Committee in
its sole discretion, the parties agree that a target bonus of at least $10,000
per quarter would be appropriate. The Executive's Salary and any Bonus will be
payable in accordance with the customary payroll practices of the Company for
its senior management personnel.
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(b) Benefits. During the Employment Term, the Executive shall be
eligible to participate, on the same basis and subject to the same
qualifications as other senior management personnel of the Company, in any
pension, profit sharing, savings, bonus, life insurance, hospitalization,
dental, drug prescription, disability, accidental death and dismemberment and
other benefit plans and policies as may from time to time be in effect with
respect to senior management personnel of the Company (collectively, the
"Benefits"). The Executive shall also be entitled to vacation days (including
the right to accrue unused vacation time from year to year if the Agreement is
renewed pursuant to Section 3 above), holidays and sick days in accordance with
the policies of the Company as may be in effect from time to time; provided,
however, that upon termination of Executive's employment for any reason
(including resignation by the Executive), the Company shall pay Executive for
accrued vacation time unused as of the last date of employment, on a pro rated
basis calculated on the basis of the Executive's Salary and Bonus in effect on
the Termination Date. The Executive shall also be entitled to receive a car
allowance of $600 per month. Upon mutual agreement of the Company and the
Executive that it would be beneficial to both parties for the Executive to
relocate his personal residence in connection with his employment hereunder, the
Company shall reimburse the Executive for the reasonable expenses related to
such relocation upon the submission of supporting documentation for such
expenses.
(c) Stock Options. As additional compensation hereunder, the Executive
shall be granted stock options to purchase up to 100,000 shares of the Company's
common stock, par value $0.01 per share (the "Common Stock"), pursuant to the
Company's 1998 Stock Incentive Plan (the "1998 Plan"). The options and any
shares of Common Stock underlying the options may be subject to certain
restrictions as disclosed in the 1998 Plan (the "Restricted Stock"). Subsequent
grants of options to purchase equity in the Company during the Employment Term
will be made at the sole discretion of the Board or the Compensation Committee.
The Company will use reasonable efforts to file a registration statement on Form
S-8 under the Securities Act of 1933, as amended, to register all shares of
Common Stock issued to the Executive under the 1998 Plan.
(d) Expenses. The Company will pay or promptly reimburse the Executive
for all reasonable out-of-pocket business, entertainment and travel expenses
incurred by the Executive in the performance of his duties hereunder upon
presentation of appropriate supporting documentation and otherwise in accordance
with the expense reimbursement policies of the Company in effect from time to
time.
(e) Taxes and Withholdings. All appropriate deductions, including
federal, state and local taxes and social security, shall be deducted from any
amount paid by the Company to the Executive hereunder in conformity with
applicable laws.
SECTION 6. CONFIDENTIALITY. The Executive acknowledges and agrees that (a) in
connection with his employment by the Company, the Executive will be involved in
the Company's and its subsidiaries' (if any) operations; (b) in order to permit
him to carry out his responsibilities, the Company may disclose, to the
Executive, in strict confidence,
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or the Executive may develop, confidential proprietary information and trade
secrets of the Company and its affiliates, including without limitation (i)
unpublished information with respect to the Company concerning marketing or
sales plans, operational techniques, strategic plans and the identity of
suppliers and supply contacts; (ii) unpublished financial information with
respect to the Company, including information concerning revenues, profits and
profit margins; (iii) internal confidential manuals and memos; and (iv)
"material inside information" as such phrase is used for purposes of the
Securities Exchange Act of 1934, as amended (collectively, "Confidential
Information"); and (c) the Company and its affiliates derive significant
economic value and competitive advantage by reason of the fact that such
Confidential Information, in whole or in part, is not generally known or readily
ascertainable by the Company's or its affiliates' actual or potential
competitors and, as such, constitutes the Company's and its affiliates' valuable
trade secrets.
In addition to any obligations set forth herein, and in
recognition of the foregoing acknowledgments, for himself and on behalf of his
affiliates, the Executive agrees that he will not, directly or indirectly, use,
disseminate or disclose, any Confidential Information (other than for the
legitimate business purposes of the Company), and that he will not knowingly
permit any of his affiliates to, directly or indirectly, use, disseminate or
disclose, any Confidential Information. At the end of the Employment Term, the
Executive agrees to deliver immediately to the Company the originals and all
copies of Confidential Information in his possession or control, whether in
written form, on computers or discs or otherwise.
The restrictions set forth in this Section 6 shall not apply
to those particular portions of Confidential Information, if any, that (a) have
been published by any of the Company or any of its affiliates in a patent,
article or other similar tangible publication or (b) become available to the
Executive from a source other than the Company, provided that the source of such
Confidential Information was not known by the Executive, after reasonable
inquiry, to be bound by a confidentiality agreement with or other obligation of
confidentiality to the Company or any of its affiliates.
The foregoing restrictions on the disclosure of Confidential
Information set forth in this Section 6 shall not apply to those particular
portions of Confidential Information, if any, that are required to be disclosed
in connection with any legal process; provided that, at least ten (10) days in
advance of any required disclosure, or such lesser time as may be required by
circumstances, the Executive shall furnish the Company with a copy of the
judicial or administrative order requiring that such information be disclosed
together with a written description of the information proposed to be disclosed
(which description shall be in sufficient detail to enable the Executive and its
affiliates to determine the nature and scope of the information proposed to be
disclosed), and the Executive covenants and agrees to cooperate with the Company
and its affiliates to deliver the minimum amount of information necessary to
comply with such order.
This Section 6 shall survive any termination of this
Agreement.
4
<PAGE> 5
SECTION 7. COVENANT NOT TO COMPETE.
(a) Scope. In order to fully protect the Company's Confidential
Information, during the Employment Term and for a period of one year thereafter
(the "Non-competition Period"), the Executive shall not, except as authorized in
writing by the Board, directly or indirectly, render services to, assist,
participate in the affairs of, or otherwise provide assistance to any person or
enterprise (other than the Company and its subsidiaries, if any), which person
or enterprise is engaged in, or is planning to engage in, and shall not
personally engage in any business that is competitive with the business of the
Company or any of its subsidiaries, if any, with respect to any products or
services of the Company or any of its subsidiaries, if any, in any capacity
which would utilize the Executive's services with respect to any products or
services of the Company or any of its subsidiaries, if any, that were within the
Executive's management responsibility at any time within the twelve (12) month
period immediately prior to the Termination Date.
(b) Remedies. The parties recognize, acknowledge and agree that (i) any
breach or threatened breach of the provisions of this Section 7 shall cause
irreparable harm and injury to the Company and that money damages will not
provide an adequate remedy for such breach or threatened breach and (ii) the
duration, scope and geographical application of this Agreement are fair and
reasonable under the circumstances, and are reasonably required to protect the
legitimate business interests of the Company. Accordingly, Executive agrees that
the Company shall be entitled to have the provisions of this Agreement
specifically enforced by any court having jurisdiction, and that such a court
may issue a temporary restraining order, preliminary injunction or other
appropriate equitable relief, without having to prove the inadequacy of
available remedies at law. In addition, the Company shall be entitled to avail
itself of all such other actions and remedies available to it or any of its
affiliates under law or in equity and shall be entitled to such damages as it
sustains by reason of such breach or threatened breach. It is the express desire
and intent of the parties that the provisions of this Agreement be enforced to
the full extent possible.
(c) Severability. If any provision of Section 7(a) is held to be
unenforceable because of the duration of such provision, the area covered
thereby or the scope of the activity restrained, the parties hereby expressly
agree that the court making such determination shall have the power to reduce
the duration and/or areas of such provision and/or the scope of the activity to
be restrained contained in such provision and, in its reduced form, such
provision shall then be enforceable. The parties hereto intend and agree that
the covenants contained in Section 7(a) shall be construed as a series of
separate covenants, one for each municipality, community or county included
within the area designated by Section 7(a). Except for geographic coverage, the
terms and conditions of each separate covenant shall be deemed identical to the
covenant contained in Section 7(a). Furthermore, if any court shall refuse to
enforce any of the separate covenants deemed included in Section 7(a), then such
unenforceable covenant shall be deemed eliminated from the provisions hereof to
the extent necessary to permit the remaining separate covenants to be enforced
in accordance with their terms.
5
<PAGE> 6
SECTION 8. RESPONSIBILITY UPON TERMINATION. Upon the termination of his
employment for any reason and irrespective of whether or not such termination is
voluntary on his part:
(a) The Executive shall advise the Company of the identity of his new
employer within then (10) days after accepting new employment and further agrees
to keep the Company so advised of any change in employment during the
Non-competition Period;
(b) The Company in its sole discretion may notify any new employer, who
the Company has good faith basis to believe is a competitor pursuant to Section
7 of this Agreement, of the Executive that he has an obligation not to compete
with the Company during the Non-competition Period; and
(c) The Executive shall deliver to the Company any and all records,
forms, contracts, memoranda, work papers, customer data and any other documents
(whether in written form, on computers or discs or otherwise) which have come
into his possession by reason of his employment with the Company, irrespective
of whether or not any of said documents were prepared for him, and he shall not
retain memoranda in respect of or copies of any of said documents.
SECTION 9. NONSOLICITATION. The Executive agrees that during the term of his
employment with the Company and for a period of twelve (12) months thereafter,
he will not, and will not assist any of his affiliates to, directly or
indirectly, recruit or otherwise solicit or induce any executive, customer,
subscriber or supplier of the Company or any of its subsidiaries about whom or
which he gained Confidential Information while at the Company to terminate its
employment or arrangement with the Company or any of its subsidiaries, otherwise
change its relationship with the Company or any of its subsidiaries, or
establish any relationship with the Executive or any of his affiliates for any
business purpose deemed materially competitive with the business of the Company
or any of its subsidiaries, if any.
SECTION 10. TERMINATION.
(a) Termination for Cause. Notwithstanding anything contained herein to
the contrary, the Board may terminate the Executive's employment with the
Company for cause; provided that the Executive shall be given notice of the
Company's intent to terminate his employment for cause, the nature of the cause,
and, if curable, a reasonable opportunity to remedy the cause. For the purposes
of this Section 10(a), the term "reasonable" shall mean that amount of time
deemed reasonable by the Board acting in good faith and in light of the nature
of the cause. For purposes of this Agreement, the term "cause" shall mean, the
occurrence of any one or more of the following (i) the commission of any act of
willful and material embezzlement or fraud on the part of Executive against the
Company, (ii) any act or omission which constitutes a willful and material
breach by Executive of this Agreement, including a refusal or failure by
6
<PAGE> 7
Executive to perform his duties and obligations hereunder, (iii) Executive has
been convicted of a crime, which conviction has, or is reasonably likely to have
a material adverse effect on the Company, or its business or will prevent the
Executive from performing his duties for a sustained period of time, (iv)
Executive becomes Disabled (as hereinafter defined), or (v) the death of
Executive; provided, however, that "cause" shall not include any act or omission
by the Executive undertaken in the good faith exercise of the Executive's
business judgment as President and Chief Operating Officer or in good faith
reliance on the advice of counsel. For purposes of this Agreement, "Disabled"
shall mean Executive's inability, due to illness, accident or any other physical
or mental condition, to fully perform the essential functions of his position or
this Agreement for more than 26 weeks consecutively or for intermittent periods
aggregating 39 weeks during any 78-week period during the Employment term,
except as otherwise required by law.
If, during the Employment Term the Company terminates the Executive's
employment pursuant to clauses (i), (ii) or (iii) of this paragraph (a), then,
from and after the date the Executive's termination is effective (the
"Termination Date"), the Executive shall (a) have no right to receive any
further Salary following the Termination Date, (b) be entitled to receive any
Bonus, payable on a pro rata basis, which may have accrued or which otherwise
would have been granted by the Board had the Executive not been terminated for
the year in which the Executive was terminated (c) cease to be covered under or
be permitted to participate in any Benefits (except payments due to the
Executive or the Executive's beneficiaries or representatives under any
applicable life or disability insurance plans or policies) and (d) shall have no
further right to purchase shares of Common Stock pursuant to the 1998 Plan;
provided, however, that all restrictions on Restricted Stock purchased by the
Executive shall, subject to applicable securities laws, rules and regulations,
lapse on the Termination Date.
If during the Employment Term the Company terminates the Executive
employment pursuant to clause (iv) or (v) of this paragraph (a), (a) the Company
shall continue to pay the Executive (or his beneficiaries, as applicable) Salary
then in effect, for a period of one year following the Termination Date in
accordance with the customary payroll practices of the Company for its senior
management personnel, (b) the Executive shall be entitled to receive any Bonus,
payable on a pro rata basis, which may have accrued or which otherwise would
have been granted by the Board had the Executive not been terminated for the
year in which the Executive was terminated, and (c) the Executive shall be
entitled to all rights with respect to any options granted or Common Stock
purchased under the 1998 Plan for a period of two years following the
Termination Date and all restrictions on Restricted Stock purchased by the
Executive shall, subject to applicable securities laws, rules and regulations,
lapse on the Termination Date.
(b) Termination Without Cause and Resignation For Good Reason. The
Company shall have the right to terminate this Agreement and the employment of
Executive with the Company for any reason or no reason and without cause upon
written notice to Executive of such termination, and the Executive shall have
the right to resign
7
<PAGE> 8
for Good Reason (as hereinafter defined); provided that, except as otherwise
provided in paragraph (c) below, (i) the Company shall continue to pay to the
Executive the Salary then in effect, together with any Bonus which may have
accrued or which otherwise would have been granted by the Board had the
Executive not been terminated or resigned for six months following the
Termination Date, in accordance with the customary payroll practices of the
Company for its senior management personnel and the Company shall continue any
benefits in which the Executive then participates on the same basis of
participation and subject to all terms and conditions of such plans as applied
prior to such termination or resignation, and all non-vested options to purchase
shares of Common Stock granted under the 1998 Plan shall vest on the Termination
Date.
(c) Termination Upon Change of Control or Resignation for Good Reason
Following a Change of Control. In the event Executive's employment is terminated
by the Company subsequent to a Change of Control (as hereinafter defined) or the
Executive resigns from the Company for Good Reason (as hereinafter defined) the
Company will pay the Executive a severance amount equal to nine months of Salary
and Bonus. If a payment is made to the Executive pursuant to this paragraph (c),
in no event shall the Executive receive any payments pursuant paragraph (b) of
this Section 10. To the extent that such amounts are in excess of the amount
allowable as a deduction under Section 280(G) of the Code, or are subject to
excise tax pursuant to Section 4999 of the Code the Company will gross-up any
additional amounts due and (iii) all non-vested options to purchase shares of
Common Stock granted under the 1998 Plan shall vest on the Termination Date and
all restrictions on Restricted Stock purchased by the Executive shall, subject
to applicable securities laws, rules and regulations, lapse on the Termination
Date.
(d) Resignation. Executive shall have the right to terminate this
Agreement and his employment with the Company upon fourteen (14) calendar days
prior written notice to the Company. Except if the Executive's resignation is
for Good Reason in accordance with paragraphs (b) and (c) above, from and after
the effective date of such resignation, Executive shall (i) have no right to
receive any further Salary or bonus hereunder; (ii) cease to be covered under or
by permitted to participate in any Benefits (except payments due the Executive
or the Executive's beneficiaries or representatives under any applicable
pension, profit sharing, life or disability insurance plans or policies); and
(iii) forfeit any and all non-vested options granted or non-vested Common Stock
purchased under the 1998 Plan.
(e) Definitions. For purposes of this Section 10 the terms listed below
shall mean the following:
(i) "Change in Control" shall mean:
(a) the direct or indirect acquisition, whether by
sale, merger, consolidation, or purchase of assets or stock, by any person,
corporation, or other entity or group thereof of the beneficial ownership (as
that term is used in Section 13(d)(1) of the Securities Exchange Act of 1934, as
amended, and the rules and
8
<PAGE> 9
regulations promulgated thereunder) of shares in the Company which, when added
to any other shares the beneficial ownership of which is held by the acquirer,
shall result in the acquirer's having more that 33% of the votes that are
entitled to be cast at meetings of stockholders as to matters on which all
outstanding shares are entitled to be voted as a single class; provided,
however, that such acquisition shall not constitute a Change of Control for
purposes of this Agreement if prior to such acquisition a resolution declaring
that the acquisition shall not constitute a Change of Control is adopted by the
Board with the support of a majority of the Board members who either were
members of the Board for at least two years prior to the date of the vote on
such resolution or were nominated for election to the Board by at least
two-thirds of the Directors then still in office who were members of the Board
at least two years prior to the date of the vote on such resolution; and
provided further, that neither the Company, nor any person who as of the date
hereof was a Director or officer of the Company, nor any trustee or other
fiduciary holding securities under an employee benefit plan of the Company, nor
any corporation owned, directly or indirectly, by the shareholders of the
Company in the substantially the same proportions as their ownership of shares
of the Company shall be deemed to be an "acquirer" for purposes of this Section.
(b) the election during any two-year period to a
majority of the seats on the Board of Directors of the Company of individuals
who were not members of the Board at the beginning of such period unless such
additional or replacement directors were approved by at least 80% of the
continuing directors.
(c) shareholder approval of a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
(ii) "Good Reason" shall mean the occurrence of (a) a
material breach of this Agreement by the Company, (b) the assignment to
the Executive of duties inconsistent with his position as described in
Section 2 herein, or any significant adverse alteration in the status
or conditions of the Executive's employment or in the nature of the
Executive's responsibilities as described in Section herein, (c) the
failure of the Company to continue to provide Executive with benefits
substantially similar to those described in this Agreement or to
continue in effect any benefit or stock option plan which is material
to the Executive's compensation, including but not limited to the 1998
Plan or (d) the failure of the Company to maintain directors' and
officers' insurance at an aggregate amount at least equal to the level
provided as of the date hereof; provided, however, in the case of (a),
(c) and (d) above, Executive shall not be deemed to have Good Reason to
terminate his employment if the reason for such termination is remedied
prior to the date of termination specified in the notice of termination
pursuant to Section 10(d) herein.
SECTION 11. AUTHORITY. Executive represents and warrants that he has the ability
to enter into this Agreement and perform all obligations hereunder, and that
there are no restrictions on Executive or any obligations owed by him third
parties which are reasonably likely, in any way, to detract from or adversely
affect his performance hereunder.
9
<PAGE> 10
SECTION 12. MISCELLANEOUS.
(a) Separate Agreements. The covenants of Executive contained
in this Agreement shall survive any termination of this Agreement and shall be
construed as separate agreements independent of any other agreement, claim, or
cause of action of Executive against the Company, whether predicated on this
Agreement or otherwise. The covenants contained in this Agreement are necessary
to protect the legitimate business interests of the Company.
(b) Entire Agreement. The parties hereto acknowledge and agree
that this Agreement supersedes all previous contracts and agreements between the
Company and Executive relating to the subject matter hereof and that any such
previous contracts or agreements shall become null and void upon execution of
this Agreement. This Agreement constitutes the complete agreement among the
parties hereto with respect to the subject matter hereof and no party has made
or is relying on any promises by any other party of their respective
representatives not contained in this Agreement.
(c) Severability. If any provision of this Agreement is held
to be illegal, invalid or unenforceable under present or future laws, such
provision shall be fully severable, this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of this Agreement, and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance from this
Agreement. If any provision of this Agreement is held to be unenforceable
because of the duration of such provision, the area covered thereby or the scope
of the activity restrained, the parties hereby expressly agree that the court
making such determination shall have the power to reduce the duration and/or
areas of such provision and/or the scope of the activity to be restrained
contained in such provision and, in its reduced form, such provision shall then
be enforceable.
(d) Successor and Assigns.
(i) This Agreement is personal in nature and neither
this Agreement nor any rights or obligations arising hereunder may be assigned,
transferred or pledged by Executive. This Agreement shall inure to the benefit
of and be enforceable by Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.
(ii) This Agreement shall be binding upon and inure
to the benefit of the Company and their successors. The rights and obligations
of the Company pursuant to this Agreement are freely assignable and transferable
by Company without the consent of Executive without his being relived of any
obligations hereunder, including, without limitation, an assignment or transfer
in connection with a merger or
10
<PAGE> 11
consolidation of the Company, or a sale or transfer of all or substantially all
of the assets of the Company; provided, the provisions of this Agreement shall
be binding on and shall inure to the benefit of the surviving business entity or
the business entity to which such assets shall be transferred and such successor
shall expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform it if no
such transaction had taken place.
(e) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the conflict of law rules thereof.
(f) Amendment. No amendment, waiver, modification or change of
an provision of this Agreement shall be valid unless in writing and signed by
both parties; provided, that any such amendment, waiver, modification or change
must be consented to on behalf of the Company by the Board. The waiver of any
breach of any duty, term or condition of this Agreement shall not be deemed to
constitute a waiver of any preceding or succeeding breach of the same or any
other duty, term or condition of this Agreement.
(g) Notices. All notices and communications under this
Agreement shall be in writing and shall be personally delivered or sent by
prepaid certified mail, return receipt requested, or by recognized courier
service, and addressed as follows:
(i) If to the Company to:
American Bank Note Holographics, Inc.
399 Executive Boulevard
Elmsford, NY 10523
Attention: President
Telephone: (212) 592-2355
Facsimile: (212) 592-4469
With a copy to:
Fulbright & Jaworski LLP
666 Fifth Avenue
New York, NY 10103
Attention: Paul Jacobs, Esq.
Telephone: (212) 318-6348
Facsimile: (212) 752-5958
(iii) If to the Executive to:
Alan Goldstein
1219 Baldwin Road
11
<PAGE> 12
Yorktown Heights, NY 10598
Telephone: (914) 245-1907
Facsimile: (914) 962-4938
or to such other address as may be specified by notice of the parties.
(h) Arbitration. Except as provided for in Section 7(b), the
Company and Executive agree that any claim or controversy arising out of or
relating to this Agreement or any breach thereof ("Arbitrable Dispute") shall be
settled by arbitration if such claim or controversy is not otherwise settled;
provided, however, that nothing set forth herein shall in any way limit the
Company's ability to seek and obtain injunctive relief in aid of arbitration
from any court of competent jurisdiction. This arbitration agreement applies to,
among others, disputes about the validity, interpretation, or effect of this
Agreement. The arbitration shall take place in New York, New York, or such other
location as to which the parties may mutually agree. Except as expressly set
forth herein, all arbitration proceedings under this Section 12(h) shall be
undertaken in accordance with the Commercial Arbitration Rules of the American
Arbitration Association (the "AAA") then in force only before individuals who
are (I) lawyers engaged full-time in the practice of law and (ii) on the AAA
register of arbitrators. There shall be one arbitrator who shall be chosen in
accordance with the rules of the AAA. The arbitrator may not modify or change
this Agreement in any way and shall not be empowered to award punitive damages
against any party to such arbitration. Each party shall pay the fees of such
party's attorneys, the expenses of such party's witnesses, and any other
expenses that such party incurs in connection with the arbitration, but all
other costs of the arbitration, including the fees of the arbitrator, the cost
of any record or transcript of the arbitration, administrative fees, and other
fees and costs shall be paid in full by the Company. Except as provided for in
Section 7(b), arbitration in this manner shall be the exclusive remedy for any
Arbitrable Dispute should Executive or the Company attempt to resolve an
Arbitrable Dispute.
(i) Indemnification Agreement. A material breach of that
certain Indemnification Agreement, entered into as of the date hereof, between
the Company and the Executive, shall constitute a material breach of this
Agreement.
(j) Counterparts. This Agreement may be executed in
counterparts, each of which will be deemed an original but all of which will
together constitute one and the same Agreement.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
By: /s/ KENNETH TRAUB
---------------------------------------
Name: Kenneth Traub
Title: President
ALAN GOLDSTEIN
/s/ ALAN GOLDSTEIN
----------------------------------------
13
<PAGE> 1
EXHIBIT 10.14
[ABH LOGO]
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
KENNETH H. TRAUB
PRESIDENT
September 15, 1999
Mr. Russell LaCoste
5049 Carillon Way
Charlotte NC 28270
Dear Russ:
It was a pleasure speaking with you again on Tuesday. We are delighted you will
be joining our management team, and we look forward to working with you.
As we discussed this letter details the revised terms of your employment that we
have agreed upon and replaces my previous letter of July 15, 1999.
<TABLE>
<S> <C> <C>
1. POSITION Executive Vice President, Sales and Marketing.
2. SALARY $225,000 per annum.
3. BONUS The minimum target bonus will be $10,000 per quarter.
The first bonus will be payable at your discretion
in either December, 1999 or January, 2000. Bonuses
will be paid at the discretion of the Board based
on the achievement of individual and corporate
objectives. Bonuses will be payable within 45 days
of the end of each quarter.
4. STOCK OPTIONS 150,000 stock options vesting over three years with
an exercise price equivalent to the market value on
the date of grant. These stock options will vest
immediately upon a change of control.
5. CAR ALLOWANCE You will receive a car allowance of $600 per month.
6. BENEFITS Participation in medical, insurance and 401K plans
available to senior executives of the Company.
</TABLE>
[LOGO]
390 EXECUTIVE BOULEVARD o ELMSFORD, NY 10523 o MAIN (914) 592-2355
DIRECT (914) 593-0809 o FAX (914) 592-4400
<PAGE> 2
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
Russell LaCoste September 15, 1999 Page Two
<TABLE>
<S> <C> <C>
7. VACATION 4 weeks per year.
8. TRAVEL The Company will pay for or reimburse you for all
business travel including frequent trips to the
Company's office in Elmsford, New York from your
home in North Carolina. You will be expected to
be in the Company's Elmsford, New York office
approximately 10 days per month, but this amount
will vary depending on business requirements.
9. CORPORATE APARTMENT The Company will provide to you a furnished
corporate apartment at the location of your
choice in the Elmsford, New York area at a cost
of up to $2,000 per month.
10. HOME OFFICE The Company will equip an office for your home
including a computer, copier and fax for you to
be able to work from home. The Company will also
reimburse you for your reasonable business
telephone bills at home as well as on a cellular
telephone.
11. RELOCATION If you relocate to the Elmsford, New York area,
the Company will reimburse you for all approved
relocation expenses.
12. SEVERANCE $250,000 severance payment if you are terminated
within three months before or after a change of
control if your termination is a direct result of
such change of control. Three months severance
payments if you are terminated without cause for
any reason other than a change of control.
</TABLE>
<PAGE> 3
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
Russell LaCoste September 15, 1999 Page Three
Russ, we are very excited about working with you. We will be planning for you
to start by October 15, but hopefully you will be able to arrange to start
sooner if it fits within your schedule.
Please give me or Sal a call if you have any questions or if there is anything
we can do for you. We look forward to working with you.
Sincerely,
/s/ Kenneth H. Traub
- ----------------------------
Kenneth H. Traub
KHT:rl
cc: Mr. Salvatore D'Amato
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financials contained in the body of the accompanying Form 10-K and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,319
<SECURITIES> 0
<RECEIVABLES> 4,154
<ALLOWANCES> 131
<INVENTORY> 5,827
<CURRENT-ASSETS> 16,373
<PP&E> 11,929
<DEPRECIATION> 6,604
<TOTAL-ASSETS> 30,820
<CURRENT-LIABILITIES> 14,350
<BONDS> 5,968
0
0
<COMMON> 136
<OTHER-SE> 14,394
<TOTAL-LIABILITY-AND-EQUITY> 30,820
<SALES> 28,669
<TOTAL-REVENUES> 28,669
<CGS> 19,064
<TOTAL-COSTS> 26,435
<OTHER-EXPENSES> 583
<LOSS-PROVISION> 379
<INTEREST-EXPENSE> 583
<INCOME-PRETAX> 2,388
<INCOME-TAX> 1,269
<INCOME-CONTINUING> 1,119
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,119
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
