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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, 1999
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. 1-14227
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 [ x ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock, $.01 par value, held by
non-affiliates of the registrant on March 22, 2000 was $40,055,750.
The aggregate number of shares of common stock, $.01 par value,
outstanding on March 22, 2000 was 13,636,000.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
1999 Form 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 15
Item 3. Legal Proceedings............................................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 19
Item 6. Selected Financial Data...................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 31
Item 8. Financial Statements and Supplementary Data.................................................. 31
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.......................................................... 31
PART III
Item 10. Directors, Executive Officers and Key Employees of Registrant................................ 32
Item 11. Executive Compensation....................................................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 40
Item 13. Certain Relationships and Related Transactions............................................... 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 43
Index to 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
19 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 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, and we have devoted substantial
resources to address the various issues that arose from the need to restate the
prior 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
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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
- 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, holograms have been
established as an important fraud prevention device on credit cards and other
transaction cards. They are also commonly used to enhance the brand image of a
transaction card issuer.
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.
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
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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 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 ("Chase"), 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 have implemented 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.
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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. We have also
recently developed a new holographic cap seal product along with a partner, and
we believe this product has important applications in the pharmaceutical and
security packaging markets.
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. In 1999, 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 Partnerships. While much of our time during 1999 was
spent on the issues described above, starting in 2000 we intend to pursue
strategic partnerships or 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.
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
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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.
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
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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.
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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 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 1999, 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, two 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
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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 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 holography
industry. In 1999, we succeeded in persuading a foreign competitor to pay us
past due royalties and to resume paying royalties under a license agreement that
we had entered into previously relating to certain foreign counterparts of the
Gallagher patents. In 1999, we received in excess of $1,000,000 in past due and
current royalties in connection with the license of the foreign counterparts of
the Gallagher patents.
EMPLOYEES
As of March 15, 2000, we employed approximately 101 persons, of which 61 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.
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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.
OUR COMMON STOCK HAS BEEN DELISTED FROM THE NEW YORK STOCK EXCHANGE.
Our common stock was suspended from trading on the New York Stock Exchange in
August 1999 and has subsequently been delisted from the NYSE. 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.
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WE DEPEND ON CREDIT CARD MANUFACTURERS FOR A SUBSTANTIAL PORTION OF OUR
BUSINESS.
During 1999 and 1998, sales to credit card companies accounted for approximately
73% and 70%, respectively, of our total sales, including MasterCard and approved
manufacturers of VISA brand credit cards, which together accounted for
approximately 45% and 56% of our total sales in 1999 and 1998, 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.
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
-10-
<PAGE> 13
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,
- expenses associated with stockholder litigation and government
investigations, 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 have implemented 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
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<PAGE> 14
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.
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 1999 and 1998, 32% and 28%, 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,
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<PAGE> 15
- 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 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
proposed plan 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 proposed plan does not seek to affect ABN's
trade obligations or payables in the ordinary course. We have submitted a
substantial claim in the proceeding for certain amounts claimed to be owed to us
by ABN. Because of ABN's financial difficulties, it may be difficult for us to
collect on these claims or any future liabilities of ABN to 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 pay its liabilities to
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
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<PAGE> 16
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.
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<PAGE> 17
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.
-15-
<PAGE> 18
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 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.
On January 20, 2000, ABN announced in an SEC filing that it was advised by the
U.S. Attorney's Office for the Southern District of New York that it is a target
of an investigation relating to the revenue recognition issues involving ABNH.
In addition, ABN announced that, in connection with the same issues, the staff
of the SEC is prepared to recommend to the SEC that enforcement proceedings be
commenced against ABN in U.S. District Court seeking injunctive relief and
monetary disgorgement. ABN also announced that it was advised by counsel to
Morris Weissman, its Chairman of the Board and Chief Executive Officer and our
former Chairman of the Board and Chief Executive Officer, that such counsel had
received similar notification from the U.S. Attorney's Office for the Southern
District of New York and the staff of the SEC with respect to Mr. Weissman.
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 the period from January 1, 1990 through July
1992 in the amount of approximately $1.6 million, plus attorney's fees and
interest on
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<PAGE> 19
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, which has been fully
paid. The full amount of the settlement was 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. Such judgment was entered
only against ABN, which contended that we should contribute to the payment of
the judgment. On February 2, 2000, the plaintiffs and defendants settled all
claims, including attorneys' fees, for $300,000, of which $110,000 has been paid
through March 15, 2000 with the remaining $190,000 to be paid by March 31, 2000.
The full amount of this settlement was accrued at December 31, 1998.
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. 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. On January 7, 2000, the
court granted our motion for summary judgment with respect to our claim. On
March 15, 2000, we entered into a settlement agreement with the defendant under
which the defendant paid $346,000 to us and the parties exchanged general
releases of all claims. We also agreed that we will resume shipments under the
May 1998 purchase order.
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 have begun settlement negotiations with the
customer, and based on those settlement negotiations we reserved $775,000 during
1999 for a breach of contract claim relating to warranties.
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.
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<PAGE> 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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<PAGE> 21
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. Our common stock was
subsequently delisted from the NYSE. 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>
Following the suspension of trading of our common stock on the NYSE, 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..................................... $ 3.05 $ 1.50
2000
First Quarter (through March 24, 2000)............. $ 3.25 $ 1.69
</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 March 22, 2000, 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.
We currently anticipate that our 2000 annual meeting of stockholders will be
held in August 2000.
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<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Sales(a) ......................... $27,865 $27,516 $23,085 $ 28,669 $ 20,695
Royalty income ................... 103 128 785 554 535
------- ------- ------- -------- --------
27,968 27,644 23,870 29,223 21,230
Costs and expenses:
Cost of goods sold ............... 13,787 14,710 12,153 19,064 11,508
Selling and administrative (b) ... 4,576 4,711 5,813 6,291 9,304
Depreciation and amortization .... 1,203 1,141 1,136 1,080 1,026
------- ------- ------- -------- --------
19,566 20,562 19,102 26,435 21,838
------- ------- ------- -------- --------
Operating (loss) income ............ 8,402 7,082 4,768 2,788 (608)
Other income ....................... 10 68 36 -- 24
Interest, net ...................... 305 305 146 (400) (985)
------- ------- ------- -------- --------
(Loss) income before taxes on income 8,717 7,455 4,950 2,388 (1,569)
Taxes on income (benefit) .......... 3,663 3,117 2,130 1,269 (494)
------- ------- ------- -------- --------
Net (loss) income .................. $ 5,054 $ 4,338 $ 2,820 $ 1,119 $ (1,075)
======= ======= ======= ======== ========
Net (loss) income per share:
Basic and diluted ................ $ 0.37 $ 0.32 $ 0.21 $ 0.08 $ (0.08)
Weighted average shares outstanding:
Basic ............................ 13,636 13,636 13,636 13,636 13,636
Diluted .......................... 13,636 13,636 13,636 13,691 13,636
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .......... $11,208 $ 9,431 $ 8,684 $ 2,023 $ 2,051
Total assets ............. 29,366 27,742 27,515 30,820 22,425
Total debt ............... -- -- 674 5,968 1,268
Total stockholders' equity 25,452 22,434 21,165 14,530 13,455
</TABLE>
- ------------
(a) In the first quarter of 1998, ABNH recorded sales of $6.5 million
related to a customer order that was transferred to ABNH's on-site
facility
(b) During the year ended December 31, 1999, we incurred costs of $3.5
million, net of $0.6 million of insurance reimbursements, in connection
with the audit committee investigation and related restatement efforts
and defense of litigation. Also during 1999, we determined that we
would not establish our own post-retirement health care plan and
reversed a $404,000 accrued liability in this regard. The costs and
reversal are included in selling and administrative expenses.
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<PAGE> 23
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.
During the year ended December 31, 1999, we were confronted with many
significant issues that had an impact on our business. In early 1999, we were
notified by our commercial bankers that we were in default on our bank debt. As
a result, we operated with very limited liquidity for most of the year and
devoted a great deal of effort and expense to refinance this debt. We also
replaced the key members of our management team including the Chairman,
President, VP Finance and Controller and reorganized our workforce in 1999. We
were also named as a defendant in class action litigation, the SEC and the U.S.
Attorney's Office initiated investigations and the NYSE delisted our common
stock. Addressing these issues has been costly and a distraction to our new
management. Furthermore, as a result of the above issues, we were under a great
deal of scrutiny by concerned customers, suppliers, employees, creditors,
stockholders and others. These factors had a negative impact on 1999 operating
performance, and we expect that these factors will continue to have a smaller
negative impact on 2000 operating performance.
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.
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<PAGE> 24
A significant portion of our business is derived from orders placed by certain
credit card companies, including MasterCard and manufacturers of VISA brand
credit cards, and variations in the timing of such orders can cause significant
fluctuations in our sales. Sales to MasterCard for the years ended December 31,
1999, 1998 and 1997 were approximately 27%, 30%, and 35%, respectively. 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 believe our relationship with
MasterCard is good. Beginning in January 2000 we have agreed to lower our
selling price to MasterCard by approximately 12%. Such reduction will have a
negative impact on our sales and gross margins. Sales to Visa card manufacturers
were approximately 18%, 26%, and 27%, respectively, of sales for the years ended
December 31, 1999, 1998 and 1997. 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. At December
31, 1999 accounts receivable from this customer totaled $0.5 million. There were
no accounts receivable from this customer at December 31, 1998.
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 1999, 1998 and 1997, export sales accounted for approximately 32%, 28%
and 25%, respectively, of total sales. All of our export sales are presently
denominated in U.S. dollars.
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.
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<PAGE> 25
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.
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 Former Parent and affiliates. We filed our
own U.S. Federal and Pennsylvania state income tax returns for 1998. Our New
York State income tax return for 1998 has not been filed.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
1998
Sales. Sales decreased by $8.0 million, or 27.8%, from $28.7 million in 1998 to
$20.7 million in 1999. The decrease in sales was primarily due to a decrease in
sales of security holograms for credit cards of $5.7 million, as a result of
$3.0 million in sales in the fourth quarter of 1998 at a discount from normal
selling prices in exchange for immediate payment, generally lower purchases of
security holograms for credit cards by card manufacturers due to higher
purchases by our customers in 1998 due to concerns regarding potential Year 2000
issues and the distractions and impact to our business associated with the need
to restate the prior financial statements.
Royalty Income. Royalty income remained relatively unchanged from 1998 to 1999.
As a percentage of sales, royalty income increased from 1.9% in 1998 to 2.6% in
1999.
Cost of Goods Sold. Cost of goods sold decreased by $7.6 million, or 39.8%, from
$19.1 million in 1998 to $11.5 million in 1999. As a percentage of sales, cost
of goods sold decreased from 66.6% in 1998 to 55.6% in 1999. The decrease
reflects decreases in the amortization of origination costs of 10% relating to
the 1998 amortization of origination costs due to lower volumes of sales than
had originally been estimated and amortization costs incurred in anticipation of
orders that did not materialize, decreased provisions for obsolete and excess
inventory of 2% due to improved product quality and a decrease in royalty
expenses of 2% related to the royalty litigation settlement reserved for in
1998, offset by an increase in warranty
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<PAGE> 26
expense of 3%, primarily resulting from a $0.8 million provision for settlement
of a breach of contract claim relating to warranties.
Selling and Administrative Expenses. Selling and administrative expenses
increased by $3.0 million, or 47.6%, from $6.3 million in 1998 to $9.3 million
in 1999. As a percentage of sales, selling and administrative expenses increased
from 21.9% in 1998 to 45.0% in 1999. This increase in selling and administrative
expenses was due primarily to costs incurred related to the audit committee
investigation and related restatement efforts and defense of litigation of $3.5
million, net of insurance reimbursements of $0.6 million, and an increase in
administrative salaries and benefits of $0.4 million, offset by a decrease in
sales expenses of $0.5 million due to lower remuneration, travel and
transportation expenses and the reversal of a liability for post-retirement
health care benefits of $0.4 million since we decided not to establish our own
plan.
Depreciation and Amortization. Depreciation and amortization remained relatively
unchanged from 1998 to 1999. As a percentage of sales, depreciation and
amortization increased from 3.8% in 1998 to 5.0% in 1999.
Other Income. Other income remained relatively unchanged from 1998 to 1999.
Interest, net. Interest, net increased by $0.6 million from $0.4 million in 1998
to $1.0 million in 1999. The increase was due to an increase in interest expense
due to the write off of deferred financing costs of $0.6 million related to the
amendments to and repayment of our credit agreement with Chase Manhattan Bank,
offset by a reduction of interest expense, which resulted from the decrease in
the revolving loan balances of $0.2 million and a decrease in interest income of
$0.2 million as a result of the cancellation of the $5.3 million note receivable
from ABN that bore interest at 7.75% per annum, which was included in the deemed
dividend discussed above.
Taxes on Income (Benefit). Taxes on income (benefit) 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 $1.8 million from $1.3 million in
1998 to $(0.5) million in 1999, as a result of the loss incurred 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 (Loss) Income. As a result of the foregoing, net (loss) income decreased by
$2.2 million from net income of $1.1 million in 1998 to a net loss of $1.1
million in 1999.
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. 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
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<PAGE> 27
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.
Royalty Income. Royalty income decreased $0.2 million or 29.4%, from $0.8
million in 1997 to $0.6 million in 1998. The decrease was due to lower reported
licensee revenue in 1998 than 1997.
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 remained relatively unchanged in 1998 compared to
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.
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.
SEASONALITY
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<PAGE> 28
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had $0.3 million of cash and cash equivalents and
working capital of $2.1 million. At December 31, 1998, we had $4.3 million in
cash and cash equivalents and working capital of $2.0 million. The 1998 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. The total amount
incurred in connection with the audit committee investigation and related
restatement efforts and defense of litigation approximated $3.5 million, net of
insurance reimbursements of $0.6 million. These costs were charged to operations
as incurred and had an adverse impact on 1999 operating results and cash flows.
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
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<PAGE> 29
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% (10.0% at December 31, 1999), 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. At December 31, 1999, we had $74,000
outstanding on the revolving credit facility and $1.0 million outstanding on the
term loan, which is payable in monthly installments of $16,667 beginning
January, 2000. No loans were outstanding on the capital expenditure loan at
December 31, 1999. In addition, we had $0.3 million of availability under the
revolving credit facility at December 31,1999.
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 comply with specified financial covenants and ratios. The loan
and security agreement also 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.
During 1999, we wrote-off unamortized deferred financing costs of approximately
$0.6 million relating to the amendments to and repayment of our credit agreement
with Chase.
During both 1999 and 1998, the weighted average interest rate of outstanding
borrowings was 8.4%. The average aggregate borrowings during 1999 and 1998 was
approximately $3.3 million and $5.2 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.
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<PAGE> 30
For the year ended December 31, 1999, our operating activities provided cash
flow of $1.5 million compared to $7.4 million and $4.0 million of cash flow
provided by operating activities in 1998 and 1997, respectively. The decrease in
cash flows was primarily due to decreased earnings of $2.2 million and a
decrease in cash provided by reductions in accounts payable, accrued expenses
and customer advances of $7.3 million offset by increases in cash provided by
accounts receivable, inventory and prepaid expenses and other of $2.3 million
and in adjustments to reconcile net income to net cash provided by operations of
$1.3.
Investing activities for the years ended December 31, 1999, 1998 and 1997 used
cash flows of approximately $0.5 million, $0.4 million, and $0.5 million,
respectively. These activities primarily reflected capital expenditures for the
respective years. We anticipate that capital expenditures in 2000 and 2001 will
be approximately $0.7 million and $1.0 million, respectively. These amounts
relating to capital expenditures required to improve production capabilities.
Financing activities for the years ended December 31, 1999, 1998 and 1997 used
cash flows of $5.1 million, $3.0 million and $3.4 million, respectively. The
activity in 1999 was comprised of repayment of revolving credit and notes
payable of $5.7 million and incurring deferred financing costs of $0.4 million,
offset by borrowings under the term loan of $1.0 million. The activity in 1998
and 1997 was comprised principally of advances to ABN and affiliates of $7.8
million and $4.1 million, respectively, borrowings under the Revolving Credit
Agreement of $4.9 million and $0.7 million, respectively, and in 1998, included
$0.4 million of borrowings under notes payable and $0.5 million of deferred
financing costs.
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 our Annual Report on Form 10-K for the year ended
December 31, 1998 and our 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 that it delisted 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.
YEAR 2000 DISCLOSURE
The Year 2000 issue is the result of computer systems and programs using two
digits rather than four to identify a given year. As a result, computer systems
or programs that are not Year 2000 compliant may not be able to distinguish
whether "00" means 1900 or 2000, which could result in a variety of failures and
other errors. In preparation for Year 2000, we tested our software and hardware
and performed remedial work on our software to ensure Year 2000 compliance.
To date we have not experienced any material difficulties associated with the
Year 2000. To our knowledge, no third party upon which we depend has experienced
a material Year 2000 problem. Our vendors of material hardware and software
components, infrastructure, and systems indicated that the products we use are
Year 2000 compliant. However, it is still possible that errors or defects may
remain
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<PAGE> 31
undetected, or that dates other than January 1, 2000 may trigger Year 2000
problems. If this occurs with respect to our software or computer systems, or
those of third parties on which we rely, our reputation, business, operating
results and financial condition could suffer.
NEW ACCOUNTING STANDARDS
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.
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, 1999
AND 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 (a)
--------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales ................. $ 5,232 $5,743 $ 5,487 $ 4,233
Cost of goods sold .... 3,397 2,462 2,560 3,089
Net (loss) income ..... (1,452) 609 (405) 173
Net (loss) income per
share-basic and diluted $ (0.11) $ 0.04 $ (0.03) $ 0.01
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales (b) ................ $10,176 $4,636 $5,091 $ 8,766
Cost of goods sold ....... 4,609 2,100 1,930 10,425
Net income (loss) ........ 2,510 387 294 (2,072)
Net income (loss) per
share-basic and diluted... $ 0.18 $ 0.03 $ 0.02 $ (0.15)
</TABLE>
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<PAGE> 32
- ---------------------
(a) During the year ended December 31, 1999, we incurred costs of $3.5
million, net of $0.6 million in insurance reimbursements in connection
with the audit committee investigation and related restatement effort
and defense of litigation. Also during 1999, we determined that we
would not establish our own post-retirement health care plan and
reversed a $404,000 accrued liability in this regard. The costs and
reversal are included in selling and administrative expenses.
(b) In the first quarter of 1998, ABNH recorded sales of $6.5 million
related to a customer order that was transferred to ABNH's on-site
secured facility (see note 1 to the financial statements).
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<PAGE> 33
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> 34
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:
Kenneth H. Traub....................... 38 President, Chief Executive Officer and Director
Salvatore F. D'Amato................... 71 Chairman of the Board
Stephen A. Benton*..................... 58 Director
Fred J. Levin*......................... 37 Director
Russell LaCoste........................ 49 Executive Vice President, Corporate
Development and Marketing
Alan Goldstein......................... 53 Vice President and Chief Financial Officer
KEY EMPLOYEES:
Michael T. Banahan..................... 42 Vice President, Sales and Marketing
George Condos.......................... 37 Controller
</TABLE>
- -------------------
* Member of the audit committee.
Kenneth H. Traub has served as our President and Chief Executive Officer since
March 2000 and as a director since April 1999. From February 1999 through March
2000, Mr. Traub served as our President and Chief Operating Officer, and from
January 1999 through February 1999 he served as our consultant. 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.
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 and was a consultant for us from time to time
between 1990 and April 1999. 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.
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<PAGE> 35
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.
Fred J. Levin has served as a director since February 2000. Mr. Levin has been
the President of the Concord Watch Division of Movado Group, Inc., a
manufacturer and marketer of watches, since March 1998. Mr. Levin also served
with Movado Group, Inc. as Senior Vice President, International from April 1995
to February 1998 and as Vice President, Distribution from February 1994 to March
1995. Prior thereto, Mr. Levin was a management consultant with McKinsey &
Company. Mr. Levin holds a B.S. in Industrial Engineering from Northwestern
University and 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.
Alan Goldstein has served as our Vice President and Chief Financial Officer
since April 1999. Mr. Goldstein served as our consultant from February 1999
through April 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.
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<PAGE> 36
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 1999, except
that Alan Goldstein and Russell LaCoste, each of whom became an officer of ABNH
in 1999, failed to timely report such events on Form 3. These events have been
subsequently reported.
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<PAGE> 37
ITEM 11. EXECUTIVE COMPENSATION.
The following table provides information concerning compensation paid to or
earned during 1997, 1998 and 1999 by each individual who served as our CEO or in
a similar capacity during 1999 and the next two most highly compensated
executive officers during 1999 (the "Named Executive Officers"). None of our
other executive officers earned salary and bonus in excess of $100,000 during
1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------- --------------------
SHARES OF COMMON
OTHER ANNUAL STOCK UNDERLYING
SALARY BONUS COMPENSATION (1) OPTIONS
NAME YEAR ($) ($) ($) (#)
- ------------------------------------- ---- ------- ------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Morris Weissman (2).................. 1997 -- -- -- --
1998 -- -- -- 400,000
1999 -- -- -- --
Kenneth H. Traub (3)................. 1997 -- -- -- --
President and Chief Executive 1998 -- -- -- --
Officer 1999 253,846 150,000 6,280 350,000
Salvatore F. D'Amato (4)............. 1997 -- -- -- --
Chairman of the Board 1998 -- -- -- --
1999 100,100 40,000 54,990 175,000
Alan Goldstein (5)................... 1997 -- -- -- --
Chief Financial Officer 1998 -- -- -- --
1999 112,718 45,000 4,656 100,000
</TABLE>
- -------------------
(1) Other Annual Compensation for Mr. D'Amato consisted of $6,690 for the use
of an automobile paid for by us and $48,300 that he received from us for
his work as a consultant prior to becoming an employee. Other Annual
Compensation for Messrs. Traub and Goldstein consisted of the use of
automobiles paid for by us.
(2) Mr. Weissman served as Chairman of the Board and Chief Executive Officer
from 1990 to April 1999.
(3) Mr. Traub has served as President and Chief Executive Officer since March
2000. He served as President and Chief Operating Officer from February 1999
to March 2000.
(4) Mr. D'Amato has served as Chairman of the Board since April 1999.
(5) Mr. Goldstein has served as Vice President and Chief Financial Officer
since April 1999.
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<PAGE> 38
The following table provides information concerning option grants during 1999 to
the Named Executive Officers. No options were exercised during 1999.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
----------------------------------------------------------- -----------------------------
SHARES OF PERCENT OF
COMMON TOTAL
STOCK OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE EXPIRATION 5% 10%
NAME (#) IN 1999 ($/SHARE) DATE ($) ($)
- -------------------------------- ---------- ---------- --------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Morris Weissman (1)............. -- -- -- -- -- --
Kenneth H. Traub (2)............ 250,000 20.1 1.75 02/02/09 275,141 697,262
100,000 8.0 2.50 05/10/09 157,224 398,436
Salvatore F. D'Amato (3)........ 175,000 14.1 2.50 04/16/09 275,141 697,262
Alan Goldstein (4).............. 100,000 8.0 2.50 05/10/09 157,224 398,436
</TABLE>
- -------------------
(1) Mr. Weissman served as Chairman of the Board and Chief Executive Officer
from 1990 to April 1999.
(2) Mr. Traub has served as President and Chief Executive Officer since March
2000. He served as President and Chief Operating Officer from February 1999
to March 2000.
(3) Mr. D'Amato has served as Chairman of the Board since April 1999.
(4) Mr. Goldstein has served as Vice President and Chief Financial Officer
since April 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,
1999.
1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT DECEMBER 31, 1999
(#) ($) (1)
--------------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Morris Weissman (2)..................... -- -- -- --
Kenneth H. Traub........................ -- 350,000 -- --
Salvatore F. D'Amato.................... -- 175,000 -- --
Alan Goldstein.......................... -- 100,000 -- --
</TABLE>
- -------------------
(1) Based on the difference between $1.59, which was the closing price per
share on December 31, 1999, and 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.
-36-
<PAGE> 39
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 directors) has discretionary
authority, subject to certain restrictions, to administer the plan. The total
number of shares reserved for issuance under the plan, as amended, is 1,863,000
shares of common stock. Options to purchase 1,375,000 shares of common stock
were outstanding under the plan as of March 15, 2000. Options to purchase an
additional 165,000 shares of common stock were outstanding outside the plan as
of March 15, 2000. 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
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.
Retirement benefits were provided by ABN to eligible employees through the
defined contribution retirement plan of ABN; the aggregate contributions to such
plan that have been charged to our operations was approximately $0.2 million in
each of the years ended 1998 and 1997. We continued to be a participating
employer in this plan through September 30, 1999, at which time we implemented
our own defined contribution plan. Contributions for the year ended December 31,
1999 aggregated $0.1 million.
DIRECTOR COMPENSATION
Each member of the board of directors who is not an employee of ABNH will
receive compensation of $12,000 per year for serving on the board of directors.
Each of these directors will also receive $1,000 for each board meeting attended
in person, $500 for each telephonic board meeting attended and $500 for each
committee meeting attended. 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 25,000 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 20% of the total option shares upon the first anniversary of the grant
of the options and for an additional 20% of the total option shares upon each
succeeding anniversary until the option is fully exercisable at the end of the
fifth year.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Salvatore F. D'Amato in April 1999
for an initial term of
-37-
<PAGE> 40
two years. As amended, the agreement provides for a base salary of $180,000 per
year. In addition, Mr. D'Amato is eligible to receive bonuses at the discretion
of our board of directors, including a target bonus of $10,000 per quarter. The
quarterly bonus is required to be paid unless the Board determines otherwise
based on certain factors. 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 his annual salary and bonus. 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.
We entered into an employment agreement with Kenneth Traub in February 1999 for
an initial term of one year. As amended, the agreement provides for an annual
base salary of $300,000, 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. The
quarterly bonus is required to be paid unless the Board determines otherwise
based on certain factors. 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 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, (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 annual salary and bonus 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 and bonus 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.
-38-
<PAGE> 41
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.
-39-
<PAGE> 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth as of March 15, 2000 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 (4)......................................... 60,333 *
Kenneth H. Traub (5)............................................. 137,500 *
Alan Goldstein (6)............................................... 33,333 *
Stephen A. Benton (7)............................................ 5,000 *
Fred J. Levin.................................................... -- *
Morris Weissman (8).............................................. 20,000 *
c/o American Banknote Corporation
410 Park Avenue
New York, NY 10022
All executives officers and directors as a group
(6 persons) (9)............................................... 239,666 1.7%
</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 March 15, 2000 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
-40-
<PAGE> 43
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 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) Includes 58,333 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2000.
(5) Includes 137,500 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2000.
(6) Consists of 33,333 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2000.
(7) Consists of 5,000 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2000.
(8) 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.
(9) Includes 234,166 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2000.
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,
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<PAGE> 44
- 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.
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.
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
proposed plan 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 proposed plan does not seek to affect ABN's
trade obligations or payables in the ordinary course. We have filed an objection
to the disclosure statement describing ABN's proposed plan of reorganization. We
have also submitted a substantial claim in the proceeding for certain amounts
that we claim ABN owes us. Because of ABN's financial difficulties, it may be
difficult for us to collect on these claims or any future liabilities of ABN to
us.
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<PAGE> 45
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>
<S> <C>
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., together with Amendment No. 1 dated
December 31, 1999 and letter dated January 4, 2000.
</TABLE>
-43-
<PAGE> 46
<TABLE>
<S> <C>
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.**
</TABLE>
- ----------------
* Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-51845).
** Incorporated by reference from the Annual Report on Form 10-K for 1998.
+ Portions have been omitted pursuant to a request for confidential
treatment.
(d) Financial Statement Schedules
See (a)(2) above.
-44-
<PAGE> 47
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT .............................................. F-2
FINANCIAL STATEMENTS:
Balance Sheets, December 31, 1999 and 1998 .............................. F-3
Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997 .................................................. F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997 ..................................... F-5
Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997 .................................................. F-6
Notes to Financial Statements ........................................... F-7
Schedule II- Valuation and Qualifying Accounts .......................... S-1
</TABLE>
F-1
<PAGE> 48
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, 1999 and 1998, and the related statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 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.
Deloitte & Touche LLP
New York, New York
March 29, 2000
F-2
<PAGE> 49
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 266 $ 4,319
Accounts receivable, net of allowance for doubtful
accounts of $390 and $131 .............................. 3,224 4,023
Inventories, net of allowances of $2,806 and $2,756 ....... 2,915 5,827
Deferred income taxes ..................................... 2,143 1,777
Prepaid expenses and other ................................ 282 427
------- -------
Total current assets ................................. 8,830 16,373
MACHINERY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS -- Net ......................................... 5,195 5,325
OTHER ASSETS ................................................... 303 680
EXCESS OF COST OVER NET ASSETS ACQUIRED -
Net of accumulated amortization of $2,264 and $1,919 ......... 8,097 8,442
------- -------
TOTAL ASSETS ................................................... $22,425 $30,820
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit .......................................... $ 74 $ 5,591
Current portion of notes payable .......................... 138 304
Current portion of long-term debt ......................... 200 --
Accounts payable .......................................... 2,494 4,376
Accrued expenses .......................................... 3,266 2,619
Customer advances ......................................... 607 1,460
------- -------
Total current liabilities ............................ 6,779 14,350
LONG-TERM DEBT ................................................. 800 --
OTHER LONG-TERM LIABILITIES, INCLUDING
NOTES PAYABLE ............................................... 56 477
DEFERRED INCOME TAXES .......................................... 1,335 1,463
------- -------
Total liabilities .................................... 8,970 16,290
------- -------
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 ......................................... 1,692 2,767
------- -------
Total stockholders' equity ........................... 13,455 14,530
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $22,425 $30,820
======= =======
</TABLE>
See notes to financial statements.
F-3
<PAGE> 50
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Sales ........................................ $ 20,695 $ 28,669 $ 23,085
Royalty income ............................... 535 554 785
-------- -------- --------
Total revenue ........................... 21,230 29,223 23,870
-------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold ............................ 11,508 19,064 12,153
Selling and administrative (Notes 9 and 11) ... 9,304 6,291 5,813
Depreciation and amortization ................. 1,026 1,080 1,136
-------- -------- --------
Total costs and expenses ................ 21,838 26,435 19,102
-------- -------- --------
Operating (loss) income ....................... (608) 2,788 4,768
-------- -------- --------
OTHER -- Net:
Interest income ............................... 31 183 305
Other income .................................. 24 -- 36
Interest expense .............................. (1,016) (583) (159)
-------- -------- --------
Total other - net ....................... (961) (400) 182
-------- -------- --------
(LOSS) INCOME BEFORE TAXES ON
INCOME ......................................... (1,569) 2,388 4,950
TAXES ON INCOME (BENEFIT) .......................... (494) 1,269 2,130
-------- -------- --------
NET (LOSS) INCOME .................................. $ (1,075) $ 1,119 $ 2,820
======== ======== ========
NET (LOSS) INCOME PER SHARE:
Basic and diluted ............................. $ (0.08) $ 0.08 $ 0.21
======== ======== ========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 51
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(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, 1997 ................ 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 ............... 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
Net (loss) ......................... -- -- -- (1,075) -- (1,075)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 .............. 13,636 $ 136 $ 11,627 $ 1,692 $ -- $ 13,455
======== ======== ======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 52
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ........................................ $(1,075) $ 1,119 $ 2,820
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization ......................... 1,026 1,080 1,136
Deferred income taxes ................................. (494) (1,196) (279)
Deferred financing costs .............................. 626 -- --
Gain on sale of equipment ............................. (12) -- --
Changes in operating assets and liabilities:
Accounts receivable ................................... 799 1,874 696
Inventories ........................................... 2,912 204 (1,081)
Prepaid expenses and other ............................ 248 (459) 127
Accounts payable, accrued expenses and other .......... (1,639) 3,313 574
Customer advances ..................................... (853) 1,460 --
------- ------- -------
Net cash provided by operating activities ........... 1,538 7,395 3,993
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ..................................... (577) (359) (461)
Proceeds from sale of equipment .......................... 38 -- --
------- ------- -------
Net cash used in investing activities ............... (539) (359) (461)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs ................................. (352) (510) --
Notes payable, net ....................................... (183) 377 --
Long-term debt borrowings ................................ 1,000 -- --
Revolving credit borrowings, net ......................... (5,517) 4,917 674
Advances to Former Parent and affiliates, net ............ -- (7,754) (4,089)
------- ------- -------
Net cash used in financing activities ............... (5,052) (2,970) (3,415)
------- ------- -------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ................................................. (4,053) 4,066 117
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR ........................................................ 4,319 253 136
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR ........................ $ 266 $ 4,319 $ 253
======= ======= =======
SUPPLEMENTAL CASH PAYMENTS:
Taxes (including amounts paid to Former Parent) .......... $ 1 $ 2,799 $ 5,485
======= ======= =======
Interest ................................................. $ 1,031 $ -- $ 159
======= ======= =======
</TABLE>
See notes to financial statements.
F-6
<PAGE> 53
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 canceled 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 prior to the
Offering 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.
F-7
<PAGE> 54
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 policies 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, 1999.
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 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, 1999, accounts receivable from this customer totaled $0.5
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, 1999 and 1998, customer advances approximating $0.6 million and
$1.5 million, respectively, represent payments received from customers for
products which have not yet been shipped ($0.5 million and $1.2 million,
respectively) and for products shipped with the right of return ($0.1 million
and $0.3 million, respectively) 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.
F-8
<PAGE> 55
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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.
F-9
<PAGE> 56
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RESEARCH AND DEVELOPMENT -- Research and development costs are expensed as
incurred (1999 -- $0.3 million, 1998 -- $0.3 million and 1997 -- $0.5 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, 1999, 1998 and 1997. 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, 1999,
options to purchase 1,420,000 shares of the Company's common stock were
excluded from the calculation of diluted net income per share because the
effect of inclusion of such options would have been antidilutive. 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, 1999, 1998 and
1997, the diluted weighted average number of shares outstanding were
13,636,000, 13,701,000 and 13,636,000, respectively.
F-10
<PAGE> 57
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
BUSINESS INFORMATION -- Sales to MasterCard were approximately 27%, 30% and 35%
of sales for the years ended December 31, 1999, 1998 and 1997, respectively.
Approximately 75% of the 1998 MasterCard sales were recorded in the first
quarter of 1998. At December 31, 1999, accounts receivable from MasterCard
approximated $0.5 million. No amounts were due from MasterCard at December 31,
1998. 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. Beginning in
January 2000, the Company agreed to lower its selling price to MasterCard by
approximately 12%. 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.
Sales to manufacturers of VISA credit cards (approximately 50 customers) were
approximately 18%, 26% and 27% of sales for the years ended December 31, 1999,
1998 and 1997, 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, 1999 and
1998, accounts receivable from these customers approximated $0.5 million and
$1.0 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 approximately 32%, 28% and 25% of sales
for the years ended December 31, 1999, 1998 and 1997, respectively. All export
sales are denominated in United States dollars. At December 31, 1999 and 1998,
accounts receivable from these customers approximated $0.5 million and $1.2
million, respectively.
RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to
conform to the current year's presentation.
F-11
<PAGE> 58
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
2. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
------- -------
<S> <C> <C>
(IN THOUSANDS)
Finished goods ..................................... $ 3,498 $ 3,430
Finished goods on consignment with customers ....... 228 487
Work in process .................................... 1,096 3,273
Origination and cylinder costs ..................... 114 427
Raw materials ...................................... 785 966
------- -------
5,721 8,583
Less: Reserve for obsolescence ..................... (2,806) (2,756)
------- -------
$ 2,915 $ 5,827
======= =======
</TABLE>
F-12
<PAGE> 59
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
3. MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment .......................... $11,420 $11,041
Leasehold improvements ........................... 890 888
------- -------
12,310 11,929
Accumulated depreciation and amortization ........ 7,115 6,604
------- -------
$ 5,195 $ 5,325
======= =======
</TABLE>
4. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Accrued contract liability ....................... $ 472 $ 472
Accrued interest expense ......................... 36 94
Warranty reserve ................................. 935 445
Federal, state and local income taxes ............ 143 144
Salaries and wages ............................... 619 387
Other ............................................ 1,061 1,077
------- -------
$ 3,266 $ 2,619
======= =======
</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 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
F-13
<PAGE> 60
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
5. TAXES ON INCOME (CONTINUED)
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. The Company has not
filed income tax returns for New York State for the year ended December 31,
1998.
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,
------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal ................ $ -- $ 2,025 $ 1,912
State and local ........ -- 440 497
------- ------- -------
-- 2,465 2,409
------- ------- -------
Deferred:
Federal ................ (383) (1,020) (240)
State and local ........ (111) (176) (39)
------- ------- -------
(494) (1,196) (279)
------- ------- -------
$ (494) $ 1,269 $ 2,130
======= ======= =======
</TABLE>
F-14
<PAGE> 61
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
5. TAXES ON INCOME (CONTINUED)
A reconciliation of the taxes on income and the amount computed by applying the
Federal income tax statutory rate of 35% follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory tax ................................... $ (549) $ 836 $ 1,733
Amortization of nondeductible goodwill .......... 122 122 122
State and local taxes, net of Federal benefit ... (72) 172 298
Nondeductible fee ............................... -- 84 --
Other ........................................... 5 55 (23)
------- ------- -------
$ (494) $ 1,269 $ 2,130
======= ======= =======
</TABLE>
The tax effects of the items comprising the Company's deferred income tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets:
Uniform capitalization of inventory ........... $ 212 $ 168
Bad debt reserve .............................. 160 54
Warranty reserve .............................. 383 182
Inventory obsolescence ........................ 1,150 1,131
Accrued vacation .............................. 38 42
Other liabilities ............................. 200 200
------- -------
Total current deferred tax assets ............. $ 2,143 $ 1,777
======= =======
Non-current deferred tax assets:
Net operating loss carryforward ............... $ (490) $ --
Postretirement medical accrual ................ -- (174)
------- -------
(490) (174)
Non-current deferred tax liabilities:
Excess tax over book depreciation ............. 1,825 1,637
------- -------
Net non-current deferred tax liabilities ...... $ 1,335 $ 1,463
======= =======
</TABLE>
At December 31, 1999, the Company has net operating loss carryforwards
available to offset future Federal income taxes of $1.1 million, which expire
in 2017, and net operating loss carryforwards available to offset future state
income taxes of $1.1 million, which expire in 2017.
F-15
<PAGE> 62
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
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
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 were 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.
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
(as amended, 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%, (10% at December 31, 1999) 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. At December 31, 1999, the Company had $74,000
outstanding on the revolving credit facility and $1.0 million outstanding on the
term loan which is payable in monthly installments of $16,667 beginning January,
2000. At December 31, 1999, no loans were outstanding on the capital expenditure
line. In addition, the Company had $0.3 million of availability under the
revolving credit facility at December 31, 1999.
F-16
<PAGE> 63
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
6. REVOLVING CREDIT AGREEMENT (CONTINUED)
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 comply with specified financial
covenants and ratios. The Loan and Security Agreement also 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.
During 1999, the Company wrote-off unamortized deferred financing costs of
approximately $0.6 million relating to the amendments to and repayment of the
Credit Agreement.
During both 1999 and 1998, the weighted average interest rate of outstanding
borrowings was approximately 8.4%. The average aggregate borrowings during 1999
and 1998 was approximately $3.3 million and $5.2 million, respectively.
At December 31, 1999, the Company has notes payable totaling approximately
$194,000, of which $139,000 is due 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%.
F-17
<PAGE> 64
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Due from (to) Former Parent and affiliates:
Balance at beginning of year ................... $ 26,134 $ 22,045
Income tax liability payable to Former
Parent .................................... (2,272) (2,307)
Taxes paid to Former Parent ................. 2,422 5,306
Cash advances to Former Parent .............. 7,685 2,851
Allocation of employee benefits(1) .......... (402) (1,052)
Sales to affiliates ......................... -- 123
Allocation of security services ............. (100) (198)
Sales and administration expenses(2) ........ (244) (592)
Allocation of general liability insurance ... -- (293)
Intercompany interest(3) .................... 156 305
Reversal of SERP liability .................. (56) --
Executive benefits(4) ....................... (13) (54)
Other ....................................... 578 --
Deemed dividend to Former Parent (see
Note 1) ................................... (33,888) --
-------- --------
Balance at end of year ......................... $ -- $ 26,134
======== ========
</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).
F-18
<PAGE> 65
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
7. RELATED PARTY TRANSACTIONS (CONTINUED)
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 $1.0 million, $0.6 million and $0.4
million of products and services in 1999, 1998 and 1997, 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 in 1997. There were no such purchases in 1999 and 1998. At
December 31, 1999 and 1998, trade accounts receivable from the Former Parent and
affiliates were $0.2 million and $0.2 million, respectively. Included in the
above are transactions in which 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 $0.2 million, $0.3 million and $0.1 million in 1999, 1998 and 1997,
respectively. At December 31, 1999 and 1998, trade accounts receivable from the
affiliate of the Former Parent under this subcontract approximated $0.2 million
and $0.1 million, respectively. At both December 31, 1999 and 1998, accounts
payable and accrued expenses include approximately $0.3 million and $0.2
million, respectively, due the Former Parent and its affiliates.
In 1997 employees of the Company received stock options under the Former
Parent's stock-based compensation plans. No such options were granted in 1999
and 1998. Had compensation cost for the stock option plans been determined based
on the fair value at the grant award dates, in 1997, consistent with the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, net income
would have been reduced by approximately $13,000 in 1997.
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,
F-19
<PAGE> 66
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
7. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
INDEMNIFICATIONS FROM FORMER PARENT -- As described above and in Notes 5 and 10,
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. As described below, 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.
On December 8, 1999, the Former Parent filed a petition and plan of
reorganization in federal bankruptcy court pursuant to Chapter 11 of the U.S.
Bankruptcy Code. The proposed plan seeks approval for a financial restructuring
resulting in the cancellation of certain of the Former Parent's outstanding
indebtedness in exchange for equity in the Former Parent as well as the
amendment of the repayment terms of certain other outstanding indebtedness of
the Former Parent. The proposed plan does not seek to affect the Former Parent's
trade obligations or payables in the ordinary course. The Company has objected
to the disclosure statement describing ABN's proposed bankruptcy plan of
reorganization. The Company has also submitted a substantial claim in the
proceeding for certain
F-20
<PAGE> 67
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
7. RELATED PARTY TRANSACTIONS (CONTINUED)
amounts, which the Company claims the Former Parent owes the Company. Because of
the Former Parent's financial difficulties, it may be difficult for the Company
to collect on these claims or any future liabilities of the Former Parent to the
Company. The Company has not recorded any amounts in its financial statements
related to the above claim.
8. 1998 STOCK INCENTIVE PLAN
Subsequent to the Offering Date, the Company adopted the 1998 Stock Incentive
Plan (as amended, 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 1,863,000 shares of common stock. Options to
purchase 1,240,000 shares of common stock were outstanding under the Plan at
December 31, 1999. Options to purchase an additional 180,000 shares of common
stock were outstanding outside the Plan at December 31, 1999. 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. The terms of options granted outside the Plan are the same as the
terms of the options granted under the Plan. 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, 1999 and 1998 and changes during the years then ended follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding, beginning of year ................... 984,250 $8.50 -- $ --
Granted ..................................... 1,244,000 2.35 984,250 8.50
Forfeited ................................... (808,250) 8.31 --
---------- ----------
Outstanding, end of year ......................... 1,420,000 3.22 984,250 8.50
========== ==========
Options exercisable, year-end .................... 67,333 8.50 -- 8.50
========== ==========
Weighted average fair value of options granted
during the year ............................. $ 1.97 $ 6.19
========== ==========
</TABLE>
F-21
<PAGE> 68
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
8. 1998 STOCK INCENTIVE PLAN (CONTINUED)
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. Included in the outstanding options at
December 31, 1998 were 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 canceled 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.
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE
--------------- ----------- ------------ -----
<S> <C> <C> <C>
$1.75 to $8.50 1,420,000 9.23 $ 3.22
</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
those options consistent with SFAS No. 123, the Company's 1999 and 1998 net
(loss) income and basic and diluted net (loss) income per share would have
differed as reflected by the pro forma amounts indicated below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998
------- ---------
<S> <C> <C>
Net (loss) income:
As reported .................................. $(1,075) $ 1,119
======= =========
Pro forma .................................... $(2,295) $ 132
======= =========
Basic and diluted net (loss) income per share:
As reported .................................. $ (0.08) $ 0.08
======= =========
Pro forma .................................... $ (0.17) $ 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>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Expected volatility ................... 71.25% 71.25%
Risk-free interest rate ............... 4.84% to 5.92% 5.48%
Dividend yield ........................ -- --
Expected life ......................... 7.5 years 7.5 years
</TABLE>
F-22
<PAGE> 69
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
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. During the years ended December 31, 1998 and 1997, costs
relating to these plans approximated $21,000 and $58,000, respectively. During
1999, the Company determined that it would not continue this plan for current
employees. Included in selling and administrative expenses is approximately $0.4
million relating to the reversal of the unfunded obligation.
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 and 1997, respectively. The Company continued to be a participating
employer in this plan through September 30, 1999, at which time it implemented
its own defined contribution plan. Contributions for the year ended December 31,
1999 aggregated $0.1 million.
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 1998 and 1997 was less
than $10,000.
F-23
<PAGE> 70
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
9. EMPLOYEE BENEFITS PLANS (CONTINUED)
In 1997, 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.
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. 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, 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.
On January 20, 2000, the Former Parent announced in an SEC filing that it was
advised by the U.S. Attorney's Office for the Southern District of New York that
it is a target of an investigation relating to the revenue recognition issues
involving the Company. In addition, the Former Parent announced that, in
connection with the same issues, the staff of the SEC is prepared to recommend
to the SEC that enforcement proceedings be commenced against the Former Parent
in U.S. District Court seeking injunctive relief and monetary disgorgement. The
Former Parent also announced that it was advised by counsel to Morris Weissman,
its Chairman of the Board and Chief Executive Officer and the Company's former
Chairman of the Board and Chief Executive Officer, that such counsel had
received similar notification from the U.S. Attorney's Office for the Southern
District of New York and the staff of the SEC with respect to Mr. Weissman.
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
F-24
<PAGE> 71
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 judgments 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 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 the period from January 1, 1990
through July 1992 in the amount of approximately $1.6 million, 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,
all of which has been paid. 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 judgment was
entered on March 19, 1999 for $175,639, with attorney's fees still to be
assessed. Such judgment was entered only against the Former Parent, which
contended that the Company should contribute to the payment of the judgment. On
February 2, 2000, the plaintiffs and defendants settled all claims, including
attorney's fees, for $300,000, of which $110,000 has been paid through March 15,
2000, with the remaining $190,000 to be paid by March 31, 2000. The full amount
of this settlement has been accrued at December 31, 1998.
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. 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. On January 7, 2000, the court granted the Company's motion for
summary judgment with respect to the claim. On March 15, 2000, the Company
entered into a settlement agreement with the defendant under which the defendant
paid $346,000 and the parties exchanged general releases of all claims. The
Company also agreed that it will resume shipments under the May 1998 purchase
order.
F-25
<PAGE> 72
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 has begun settlement negotiations with the customer and based on
those settlement negotiations the Company reserved $775,000 during 1999 for a
breach of contract claim relating to warranties.
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, 1999 and 1998,
accruals for litigation matters approximated $315,000 and $500,000,
respectively. It is anticipated that the $315,000 accrual will be paid in 2000.
The Company believes, based on information known at December 31, 1999, that
anticipated probable costs of litigation matters as of December 31, 1999 have
been adequately provided to the extent determinable.
F-26
<PAGE> 73
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $1.3 million for the year ended December
31, 1999 and $1.2 million for each of the years ended December 31, 1998 and
1997.
At December 31, 1999, future minimum lease payments under noncancelable
operating leases are as follows: $1.1 million in 2000; $0.9 million in 2001;
$0.9 million in 2002; $0.8 million in 2003; $0.8 million in 2004; and $1.9
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 $658,000 in 2000 and $115,000 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 DELISTING -- 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 delisted 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.
F-27
<PAGE> 74
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
11. OTHER
During 1999, the Audit Committee of the Company's Board of Directors commenced a
special investigation into the events that resulted in the need to restate the
Company's financial statements for the years ended December 31, 1997 and 1996
and the first three quarters of 1998. The costs of the special investigation and
related restatement effort and legal defense approximated $3.5 million, net of
insurance reimbursements of $0.6 million, and are included within selling and
administrative expenses in the accompanying statements of operations.
F-28
<PAGE> 75
SCHEDULE II
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<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, 1999:
Allowance for doubtful accounts
(deducted from accounts
receivable) ..................... $ 131 $ 342 $ 83(1) $ 390
====== ====== ====== ======
Allowance for obsolescence
(deducted from inventory) ....... $2,756 $1,295 $1,245 $2,806
====== ====== ====== ======
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:
Allowance for doubtful accounts
(deducted from accounts
receivable) ..................... $ 245 $ 732 $ 809(1) $ 168
====== ====== ====== ======
Allowance for obsolescence
(deducted from inventory) ....... $ 265 $ 202 $ -- $ 467
====== ====== ====== ======
</TABLE>
- ----------
(1) Accounts deemed to be uncollectible, net of recoveries.
S-1
<PAGE> 76
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 Executive Officer
March 30, 2000
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 Executive Officer and March 30, 2000
- ------------------------ Director (Principal Executive Officer)
KENNETH H. TRAUB
/s/ Alan Goldstein Chief Financial Officer March 30, 2000
- ------------------------ (Principal Financial and
ALAN GOLDSTEIN Accounting Officer)
/s/ Salvatore F. D'Amato Chairman of the Board March 30, 2000
- ------------------------
SALVATORE F. D'AMATO
/s/ Stephen A. Benton Director March 30, 2000
- ------------------------
STEPHEN A. BENTON
/s/ Fred J. Levin Director March 30, 2000
- ------------------------
FRED J. LEVIN
</TABLE>
<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
7
<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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<PAGE> 17
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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<PAGE> 19
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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<PAGE> 20
(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 Equipment is used or held for use in
Borrower's business 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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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
50
<PAGE> 51
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
51
<PAGE> 52
hereby and shall not be contradicted or qualified by any other agreement, oral
or written, before the date hereof.
52
<PAGE> 53
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> 54
FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025-3333
December 31, 1999
American Bank Note Holographics, Inc.
399 Executive Boulevard
Elmsford, New York 10523
Re: Amendment No. 1 to Loan and Security Agreement
Gentlemen:
Reference is hereby made to that certain Loan and Security Agreement dated
as of September 29, 1999 (as amended, modified and supplemented, the "Loan
Agreement") between AMERICAN BANK NOTE HOLOGRAPHICS, INC. ("Borrower") and
FOOTHILL CAPITAL CORPORATION ("Lender"). Capitalized terms used herein, which
are not defined, shall have the meanings given to them in the Loan Agreement.
Subject to the terms and conditions hereof, this letter will confirm our
agreement to amend the Loan Agreement as follows:
1. Section 1.1 of the Loan Agreement is amended by deleting the
definition of "Eligible Bill and Hold Inventory" in its entirety.
2. The definition of "Borrowing Base" in Section 2.1(a) of the Loan
Agreement is amended by deleting the words "and Eligible Bill and
Hold Inventory," therefrom.
3. Section 3.3(c)(y) of the Loan Agreement is amended by deleting the
words "by December 31, 1999" and replacing them with the words "by
January 31, 2000".
4. All references to "Eligible Bill and Hold Inventory" in the Loan
Agreement are hereby deleted.
The amendments set forth herein shall be effective upon receipt by the
Lender of four (4) counterparts of this letter duly executed by the Borrower.
Except as expressly provided herein, all of the representations,
warranties, terms, covenants and conditions of the Loan Agreement and the Loan
Documents shall remain unamended and shall continue to be and shall remain, in
full force and effect in accordance with their respective terms.
<PAGE> 55
The amendments set forth herein shall be limited precisely as provided for
herein to the provisions expressly amended herein and shall not be deemed an
amendment of, consent to or modification of any other term or provision of the
Loan Agreement or any Loan Documents.
Very truly yours
FOOTHILL CAPITAL CORPORATION
By: /s/ Paul G. Chao
------------------------
Name: Paul G. Chao
Title: AVP
CONSENTED AND AGREED TO:
AMERICAN BANK NOTE
HOLOGRAPHICS, INC.
By: /s/ Alan Goldstein
--------------------------
Name: Alan Goldstein
Title: VP and CFO
-2-
<PAGE> 56
[ABNH LETTERHEAD]
January 4, 2000
Mr. Paul Chao
Assistant Vice President/
Assistant Account Executive
FOOTHILL CAPITAL CORP.
60 State Street - Suite 1150
Boston, MA 02109
RE: MASTERCARD
Dear Paul:
In regard to the Loan and Security Agreement dated September 29, 1999 (the "Loan
Agreement"), between American Bank Note Holographics, Inc. and Foothill Capital
Corporation, please note the following in regard to MasterCard accounts
receivables:
- - We are not currently borrowing against MasterCard receivables at the
present time.
- - We will not seek to borrow against the MasterCard receivables until such
time that all terms and conditions regarding the MasterCard receivables are
reasonably satisfactory to Foothill.
Nothing in this letter is intended to limit any other provision of the Loan
Agreement.
Sincerely,
/s/ Alan Goldstein
Alan Goldstein
Vice President
Chief Financial Officer
AG/rl
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 266
<SECURITIES> 0
<RECEIVABLES> 3,614
<ALLOWANCES> 390
<INVENTORY> 2,915
<CURRENT-ASSETS> 8,830
<PP&E> 12,310
<DEPRECIATION> 7,115
<TOTAL-ASSETS> 22,425
<CURRENT-LIABILITIES> 6,779
<BONDS> 1,268
0
0
<COMMON> 136
<OTHER-SE> 13,319
<TOTAL-LIABILITY-AND-EQUITY> 22,425
<SALES> 20,695
<TOTAL-REVENUES> 21,230
<CGS> 11,508
<TOTAL-COSTS> 21,838
<OTHER-EXPENSES> 1,016
<LOSS-PROVISION> 342
<INTEREST-EXPENSE> 1,016
<INCOME-PRETAX> (1,569)
<INCOME-TAX> (494)
<INCOME-CONTINUING> (1,075)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,075)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
