<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from to
Commission file number 0-3035
COGNITRONICS CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-1953544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Corporate Drive, Danbury, Connecticut 06810-4130
(Address of principal executive offices) (Zip Code)
(203) 830-3400
Registrant's telephone number, including area code
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, and (2) has been subject to such filing requirements
for at least the past 90 days. Yes x No
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of September 30, 1995.
Common Stock, par value $0.20 per share -- 3,408,929 shares
<PAGE> 2
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
1995 1994
(Unaudited)
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,617 $ 2,940
Accounts receivable, net 2,699 2,316
Inventories 2,882 2,682
Deferred income taxes 685 599
Other current assets 67 653
------- -------
TOTAL CURRENT ASSETS 9,950 9,190
PROPERTY, PLANT AND EQUIPMENT, NET 1,263 1,354
GOODWILL, NET 2,396 2,646
DEFERRED INCOME TAXES 835 823
OTHER ASSETS 91 167
------- -------
$14,535 $14,180
======= =======
LIABILITIES AND STOCKHOLERS' EQUITY
CURRENT LIABILITIES
Notes payable $ $ 500
Accounts payable 1,103 1,064
Accrued salaries, wages and benefits 700 596
Income taxes payable 461 44
Common Stock subject to repurchase 1,250
Other accrued expenses 935 780
------- -------
TOTAL CURRENT LIABILITES 3,199 4,234
LONG-TERM DEBT 385 407
OTHER NON-CURRENT LIABILITIES 2,500 2,497
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 10,000,000
shares; issued 3,408,929
and 3,164,621 shares 682 633
Additional paid-in capital 11,951 11,423
Accumulated deficit (3,768) (4,774)
Unearned compensation (366)
Treasury shares, 33,071,
at cost (192)
Translation adjustment (48) (48)
------- -------
TOTAL STOCKHOLDERS' EQUITY 8,451 7,042
------- -------
$14,535 $14,180
======= =======
See Note to Condensed Consolidated Financial Statements.
<PAGE> 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1995 1994 1995 1994
---- ---- ---- ----
NET SALES $4,038 $3,684 $13,436 $11,228
COST AND EXPENSES:
Cost of products sold 1,875 1,890 6,310 5,951
Research and development 330 407 1,093 1,155
Selling, general and
administrative 1,194 1,278 3,909 3,751
Amortization of goodwill 83 83 249 249
Other (income) expense,
net 21 (19) 126 (33)
------ ------ ------- -------
3,503 3,639 11,687 11,073
------ ------ ------- -------
Income from operations
before income taxes 535 45 1,749 155
PROVISION FOR INCOME TAXES 191 69 743 220
------ ------ ------ -------
NET INCOME (LOSS) $ 344 $ (24) $ 1,006 $ (65)
====== ====== ====== =======
NET INCOME (LOSS) PER SHARE $.10 $(.01) $.30 $(.02)
==== ===== ==== =====
Weighted average number of
common and common equivalent
shares outstanding 3,582,739 3,137,933 3,396,094 3,137,933
========= ========= ========= =========
See Note to Condensed Consolidated Financial Statements.
<PAGE> 4
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Nine Months Ended
September 30
-----------------
1995 1994
---- ----
NET CASH PROVIDED BY
OPERATIONS $2,270 $ 906
INVESTING ACTIVITIES
Additions to property, plant and
equipment, net (154) (123)
Cash expended related to Dacon
acquisition (71)
------ ------
NET CASH USED BY INVESTING
ACTIVITIES (154) (194)
------ ------
FINANCING ACTIVITIES
Shares subject to repurchase (500)
Payment of debt (1,712) (734)
Issuance of debt 647 749
Proceeds from note receivable 1,893
Exercise of stock options 126
------ ------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (1,439) 1,908
------ ------
INCREASE IN CASH 677 2,620
CASH - BEGINNING OF PERIOD 2,940 436
------ ------
CASH - END OF PERIOD $3,617 $3,056
====== ======
INCOME TAXES PAID $ 78 $ 27
====== ======
INTEREST EXPENSE PAID $ 125 $ 104
====== ======
See Note to Condensed Consolidated Financial Statements.
<PAGE> 5
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1995
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule 10-
01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for com-
plete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month and
nine-month periods ended September 30, 1995 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1995. The
balance sheet at December 31, 1994 has been derived from the audited finan-
cial statements at that date. For further information, refer to the consoli-
dated financial statements and footnotes thereto and the quarterly financial
data included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
Inventories September 30, December 31,
(in thousands): 1995 1994
------------- ------------
Finished and in process $1,761 $1,832
Materials and purchased parts 1,121 850
------ ------
$2,882 $2,682
====== ======
Other Non-Current Liabilities (in thousands):
September 30, December 31,
1995 1994
------------- ------------
Accrued Supplemental Pension Plan $ 742 $ 741
Accrued Deferred Compensation 339 341
Accrued Pension Expense 777 804
Accrued Post-retirement Benefit
Liability 781 764
------ ------
2,639 2,650
Less current portion 139 153
------ ------
$2,500 $2,497
====== ======
RESTRICTED STOCK PLAN
In 1995, the Restricted Stock Plan, providing for the grant of up to 150,000
shares of the Company's common stock to key employees, was adopted by the
Company. During the quarter ended June 30, 1995, 125,000 shares were granted
under the Plan and $399,000 of unearned compensation was recorded, $33,000 of
which was charged to expense through September 30, 1995.
<PAGE> 6
CONTINGENCIES
Pending Litigation. In 1993, a purported consolidated class action lawsuit
was filed against the Company and certain of its officers alleging securities
law violations in connection with the purchase of the Company's common stock
by members of the purported classes during the period from October 29, 1992
through March 12, 1993. The plaintiffs seek unspecified damages and related
costs. The Company and the other defendants submitted a motion to dismiss
the consolidated amended complaint. The Company has denied any wrongdoing
and believes it has presented viable grounds to support the motion to dis-
miss. The motion is sub judice. Due to the uncertainties involved in litiga-
tion, the ultimate outcome cannot be determined at this time, and no provi-
sion for any liability that may result from this litigation, if any, has been
made in the financial statements.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the quarter and nine months ended September 30, 1995, the Company report-
ed net income of $344,000 and $1,006,000, respectively, versus a net loss of
$24,000 and $65,000, respectively, in the comparable periods of 1994. The
improved results are due to higher sales and cost reductions.
Sales increased $354,000 (10%) and $2,208,000 (20%), respectivley, in the
three-month and nine-month periods ended September 30, 1995 over the prior
year primarily due to sales increases of $872,000 (79%) and $2,170,000 (66%)
respectively, in the Company's United Kingdom operations due to increased
sales of distributorship products. Sales to unrelated third parties of the
Company's domestic operations for the three months ended September 30, 1995
decreased $518,000 (20%) from the prior year period due to lower volume of
McIAS 1100 and 1500 systems, offset in part by higher volume of McIAS 2100s
and McIAS 16xxs. Sales for the domestic operations for the nine-month period
were essentially unchanged from the prior year in spite of sales of McIAS
upgrade kits ($1,900,000) and higher volume of McIAS 16xxs and 2100s, due to
lower volume of McIAS 1100s and 1500s.
Consolidated backlog increased to $2.1 million at September 30, 1995, up from
$1.6 million at June 30, 1995. In addition, during the third quarter, the
acceptance test of the McIAS 1623 by a switch manufacturer was completed.
The Company anticipates sales of this product to commence in the fourth
quarter 1995.
Gross margin percentage increased to 54% and 53%, respectively, in the three-
month and nine-month periods ended September 30, 1995 from 49% and 47%,
respectively, in the comparable periods of 1994 primarily due to product mix,
higher absorption of overhead and lower cost of distributorship type
products.
Research and development expense decreased $77,000 (19%) in the quarter ended
September 30, 1995 from the prior year's period primarily due to the reduc-
tion of overhead expenses.
<PAGE> 7
Under Financial Accounting Standards Board ("FASB") Statement No. 109, the
Company has recognized future tax benefits that management believes will be
realized. In order to realize this benefit, the Company will have to gener-
ate domestic pretax income of $3.8 million during the carryforward period (15
years) commencing January 1, 1995. The Company's domestic pretax income for
the nine months ended September 30, 1995 was $.9 million.
The current deferred tax benefit of $.7 million is primarily attributable to
inventory provisions and valuation reserves and the recognition of such
losses, for tax purposes, are, in large measure, within the control of the
Company. The non-current tax benefit, $.8 million, primarily relates to
deferred compensation and benefit plans and, as such, would be recognized
over a long period of time. The Company's U.S. pretax income (loss) from
continuing operations was ($.3) million, ($1.5) million and $2.9 million in
years ended December 31, 1994, 1993 and 1992, respectively. In 1994, the
benefit of cost reduction programs initiated in 1993 and 1994 were not fully
realized and included in the 1993 loss were additional inventory provisions,
severance expense and writedown of assets, aggregating approximately $1.5
million. The losses in 1994 and 1993 also reflect a decline in the demand
for the Company's McIAS 2100 series of products. The Company anticipates
additional revenue contributions from the introduction of new products at
varying price feature points and upgrade programs for the large installed
base of McIAS systems. Based on this and the full impact of cost reduction
programs already instituted, management anticipates that the Company will
generate sufficient taxable income in the future to realize these benefits.
Liquidity and Sources of Capital
Working capital and the ratio of current assets to current liabilities in-
creased to $6.8 million and 3.1:1 at September 30, 1995 compared to $5.0
million and 2.2:1 at December 31, 1994, respectively. The improvement in
1995 is due mainly to the Company's improved results of operations.
In the quarter ended September 30, 1995, the Company prepaid the $542,000
liability related to the acquisition of Dacon Electronics Plc. In addition,
the Company entered into a $1 million line of credit agreement with a bank.
The Company projects spending approximately $.3 million over the next year on
the purchase of equipment and to increase its research and development ef-
forts. The Company anticipates a positive cash flow from operations, which
combined with its current cash balance and other sources of capital, is
expected to be sufficient to finance its cash needs through 1996.
In 1993, a purported consolidated class action lawsuit was filed against the
Company and certain of its officers (See Note to Condensed Consolidated
Financial Statements). Due to the uncertainties involved in litigation, the
ultimate outcome cannot be determined at this time.
<PAGE> 8
Part II
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits
Exhibit
10.1 Revolving Loan Agreement between Cognitronics
Corporation and People's Bank dated September 8,
1995 (attached is Exhibit 10.1 to this Quarterly
Report on Form 10Q)
27 Financial Data Schedule (attached as Exhibit 27
to this Quarterly Report on Form 10Q)
(b) No reports on Form 8-K were filed during the current quarter.
SIGNATURES
Pursuant to the requirements 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.
COGNITRONICS CORPORATION
Registrant
Date: October 30, 1995 By /s/Garrett Sullivan
_________________________
Garrett Sullivan, Treasurer
and Chief Financial Officer
<PAGE> 1
EXHIBIT 10.1
REVOLVING LOAN AGREEMENT
THIS REVOLVING LOAN AGREEMENT (the "Agreement") is made
this 8th day of September, 1995, by and between PEOPLE'S BANK, a
banking corporation organized and existing under the laws of the
State of Connecticut (the "Bank), and COGNITRONICS CORPORATION,
a corporation organized and existing under the laws of the State
of New York, having its principal place of business and chief
executive office at 3 Corporate Drive, Danbury, Connecticut
06810 (the "Borrower").
PREMISES: The Borrower has applied to the Bank for a
$1,000,000.00 revolving line of credit, to fund its ongoing
working capital requirements. The Bank has agreed to provide
this line of credit, subject to the terms and conditions set
forth herein.
The parties agree that it is necessary and desirable to
structure this transaction in a manner that will afford the Bank
continuous and timely access to financial records and other
relevant information relating to the Borrower's business
activities and financial condition. Compliance with all of the
reporting requirements contained in this Agreement is
acknowledged by the Borrower as being of the highest importance
to the Bank. Moreover, the Bank is willing to enter into this
transaction only if it is given the discretion to determine when
terms and conditions herein are satisfied, when and in what
amounts future loan advances are to be made and when, to what
extent and by whom actions designed to preserve its collateral
position are to be taken.
NOW, THEREFORE, the parties mutually agree, represent and
warrant as follows:
ARTICLE I. DEFINITIONS
As used herein and in any certificate, report or document
made or delivered pursuant to this Agreement, the following
terms shall have the meanings hereinafter respectively assigned
(with terms defined in the singular having comparable meanings
when used in the plural and vice versa, and with the pronouns
"he", "she", and "it", and comparable terms, deemed to include
entities of any gender):
<PAGE> 2
(a) Unless otherwise specifically defined herein,
the terms "accounts", "documents", "equipment",
"fixtures", "general intangibles", "goods", "instruments",
"inventory", "proceeds", "products" and all other terms
defined in the Uniform Commercial Code as adopted by the
State of Connecticut in Title 42(a) of the Connecticut
General Statutes, as amended (the Connecticut Uniform
Commercial Code), shall have the meanings respectively
assigned to such terms in the Connecticut Uniform
Commercial Code.
(b) The term "affiliate" of another person means
(i) a person which, directly or indirectly, controls or is
controlled by or is under common control with such other
person; (ii) if such other person is a corporation, a
person that holds, owns or controls, directly or
indirectly, the power to vote or to effect a disposition
of 10% or more of any class of equity securities of such
corporation, or holds a 10% or greater interest in the net
income or net assets of such corporation (or a comparable
interest in any such other person that is an
unincorporated association); (iii) any officer, director,
partner or employee of such other person; or (iv) if such
other person is an individual, any relative or spouse of
such other person, or any relative of such spouse, who
has the same home as such other person. The term
affiliate of Borrower shall specifically include Dacon
Electronics, Plc, Dacon Electronics Corp., Stamford
Crescent Corp., American Computer Corporation, and Reed
Printing, Inc. For purposes of this definition,
"control", including its correlative terms, as used with
respect to any corporation, shall mean the possession,
directly or indirectly, of the power to direct or cause
the direction of the management or policies of such
corporation, whether through the ownership of voting
securities, by contract or otherwise.
(c) The term "Capital Expenditure" means any
expenditure for the purchase, lease or rental of fixed or
capital assets (including, but not limited to, the
purchase, construction, and rehabilitation of equipment or
other physical assets).
(d) The term "Collateral" is defined in Section
3.01.
(e) The term "Cash Accounts" is defined in Section
2.06.
<PAGE> 3
(f) The term "Commitment Amount" is defined in
Section 2.01.
(g) The term "Capital Funds" means the consolidated
Tangible Net Worth of the Borrower, plus loans to the
Borrower that are subordinated to the Obligations, and
minus loans to officers and employees.
(h) The term "current assets" means the assets
treated as current assets in accordance with generally
accepted accounting principles consistent with those used
in the preparation of the Financial Statements.
(i) The term "current liabilities" means the
liabilities treated as current liabilities in accordance
with generally accepted accounting principles consistent
with those used in the preparation of the Financial
Statements, including without limitation (i) obligations
payable on demand or within one year after the date on
which the determination is made, and (ii) final maturities
and sinking fund payments required to be made within one
year after the date on which the determination is made,
but excluding all such liabilities or obligations which
are receivable or extendable at the option of the Borrower
to a date more than one year from the date of
determination.
(j) The term "Eligible Receivables" mean Borrower's
accounts receivable which are outstanding fewer than 91 days
from original invoice date, provided that each such receivable:
(i) represents an undisputed bona fide indebtedness incurred by
a customer of Borrower in the amount indicated on the invoice
evidencing the receivable, with respect to a sale and delivery
of merchandise or the performance of work, labor or services
rendered or to be rendered by Borrower upon specified terms no
greater than net forty-five (45) days; (ii) is not due from an
affiliate, subsidiary, officer or employee of Borrower or any of
its successors or assigns; (iii) is not a contra or offset
account; (iv) is assignable; (v) is the obligation of a solvent
account debtor (or guarantor) having a principal place of
business in the United States or Canada; (vi) is not now, nor
shall at any time become, contingent upon the fulfillment of any
contract, additional performance or condition whatsoever, and is
not subject to any defense,
<PAGE> 4
offset, or counterclaim; (vii) is not represented by any
note or other negotiable instrument, except such as have been
endorsed and delivered by the Borrower to the Bank
simultaneously with the submission to the Bank by Borrower of a
confirmatory assignment schedule; (viii) does not arise from a
transaction which violates any applicable law, regulation or
ordinance; and (ix) is not specified hereafter individually or
categorically by the Bank in its sole and unfettered discretion
as unacceptable.
(k) The term "ERISA" means, at any date, the
Employee Retirement Income Security Act of 1974, as
amended, and the rules, interpretations and regulations
thereunder, as the same shall be in effect.
(l) The term "Event of Default" is defined in
Section 6.01.
(m) The term "Financial Statements" means the
consolidated financial statements of the Borrower, dated
as of December 31, 1994, as audited by Ernst & Young LLP,
the Borrower's independent accountants.
(n) The terms "generally accepted accounting
principles" and "GAAP" mean generally accepted accounting
principles as defined by the Financial Accounting
Standards Board.
(o) The term "Guarantors" shall mean Dacon
Electronics Corp. and Stamford Crescent Corp., pursuant to
their written guaranties of the Obligations of even date
herewith.
(p) The term "Indebtedness" means all items of
indebtedness, obligation or liability, whether matured or
unmatured, liquidated or unliquidated, direct or
contingent, joint or several, including, but without
limitation:
(i) All items of indebtedness or liability which,
according to generally accepted accounting principles,
should be included in a balance sheet as at the date on
which the liabilities are to be determined;
(ii) All indebtedness guaranteed, directly or
indirectly, in any manner, or endorsed (other than for
collection or deposit in the ordinary course of business)
or discounted with recourse;
<PAGE> 5
(iii) All indebtedness (contingent or otherwise) in
effect guaranteed, directly or indirectly, through
agreements: (1) to purchase such indebtedness; or (2) to
purchase, sell or lease (as lessee or lessor) property,
projects, materials or supplies or to purchase or sell
services, primarily for the purpose of enabling the debtor
to make payment of such indebtedness or to assure the
owner of the indebtedness against loss; or (3) to supply
funds to or in any other manner invest in the debtor; and
(iv) All indebtedness secured by (or for which the
holder of such indebtedness has a right, contingent or
otherwise, to be secured by) any mortgage, deed of trust,
pledge, lien, security interest or other charge or
encumbrance upon property owned by the obligor or acquired
subject thereto, whether or not the liabilities secured
thereby have been assumed;
(q) The term "Laws" means all ordinances, statutes,
rules, regulations, orders, injunctions, writs or decrees
of any government or political subdivision or agency
thereof, or any court or other similar juridical entity.
(r) The term "Prime Rate" shall mean the per annum
rate of interest designated by the Bank from time to time
as its prime rate, which may not necessarily be the Bank's
lowest or best rate. The Prime Rate may be determined and
re-determined on a daily basis, and each change in the
Prime Rate shall be effective on and following the date of
such change without notice or demand to the Borrower,
until again changed by the Bank.
(s) The term "Obligations" means the obligation of
the Borrower:
(i) To pay the principal and interest on the
Revolving Loan in accordance with the terms hereof,
whether resulting from extensions of credit prior to or
after the occurrence of an Event of Default, and to
satisfy all of its other Indebtedness owed to the Bank,
whether hereunder or otherwise, whether now existing or
hereafter incurred, matured or unmatured, direct or
contingent, joint or several, including any extensions,
modifications, renewals thereof and substitutions
therefor;
<PAGE> 6
(ii) To reimburse to the Bank all amounts
advanced by the Bank hereunder or otherwise to or on
behalf of the Borrower, including, but without
limitation, advances for principal or interest
payments to prior secured parties, mortgagees, or
lienors, or for taxes, levies, insurance, rent,
repairs to or maintenance or storage of any of the
Collateral, or any other amounts expended in
connection with any property securing all or any
portion of the Obligations;
(iii) To indemnify the Bank against, and to
hold it harmless from, any and all liabilities,
damages, losses incurred by, imposed upon, or
sustained by the Bank in protecting, taking
possession of, collecting, liquidating, or otherwise
realizing upon the Collateral or in exercising any
other rights or utilizing any other remedies
provided in this Agreement or afforded by any
applicable Laws, except such liabilities, damages,
or losses resulting from the Bank's own gross
negligence or willful misconduct.
(iv) To reimburse the Bank for all of the
Bank's expenses and costs, including the reasonable
fees and expenses of its counsel and consultants, in
connection with the preparation, administration,
amendment, modification, or enforcement of this
Agreement and the other documents required hereunder.
(t) The term "person" shall include natural
persons, corporations, associations, companies,
partnerships, business trusts and other unincorporated
business organizations.
(u) The term "Revolving Loan" is defined in
Section 2.01 hereof.
(v) The term "Security Agreement" is defined in
Section 3.01 hereof.
(w) The term "subsidiary" means any corporation or
other business entity of which more than fifty percent
(50%) of the outstanding voting securities or interest
shall, at the time of determination, be owned directly, or
indirectly through one or more intermediaries, by the
Borrower.
<PAGE> 7
(x) The term "Tangible Net Worth" of Borrower
means, at a particular date, all amounts which would, in
conformity with GAAP, be included under shareholders'
equity on a consolidated balance sheet of Borrower at such
date; provided, however, that such amounts are to be net
of the amounts carried on the books of Borrower for: (i)
any write-up in book value of any assets of Borrower
resulting from a revaluation after the date hereof; (ii)
treasury stock; (iii) unamortized debt discount and
expense; (iv) any cost of investments in excess of net
assets acquired at any time by Borrower; (v) patents,
patent applications, copyrights, trademarks, trade names,
and other like intangibles; and (vi) good will, research,
development or experimental expenses, and organizational
expenses.
ARTICLE II. REVOLVING LOAN
Section 2.01. Amount and Terms. Subject to the
satisfaction of the terms and conditions hereof, and in
reliance on the representations and warranties contained
herein, the Bank may, in its sole and unfettered discretion,
subject to the provisions of this Agreement, and specifically
with respect to the eligibility criteria set forth below,
extend to the Borrower on a revolving basis (the "Revolving
Loan"), from time to time, an amount or amounts not exceeding
the lesser of the following amounts (the "Commitment Amount"):
(i) One Million and 00/100 ($1,000,000.00) Dollars; or (ii) an
amount equal to the value of seventy (70%) percent of Eligible
Receivables. The unpaid principal and all accrued and unpaid
interest shall become due and payable in full, upon DEMAND by
the Bank, but in no event later than September 1, 1996 (the
"Maturity Date"). The Borrower may from time to time repay any
portion of the Revolving Loan without penalty or premium, in
which event the principal amount repaid may again become
available for advance subject to the conditions set forth
herein. In the event that the Bank honors requests for loans
or advances with the result that the outstanding principal
balance exceeds the maximum amount set forth above, the entire
outstanding principal balance shall be subject to and governed
by the terms and conditions hereof and shall be repaid at the
time provided for in this Section 2.01. To the extent the
Borrower requests that a portion of the Revolving Loan be
employed to fund letters of credit, acceptances, certifications
or the like, the Bank reserves the right to impose any
conditions or procedures in respect of such funding, in
addition to those conditions or procedures for advances
hereunder.
<PAGE> 8
Section 2.02. Interest. All amounts outstanding under
the Revolving Loan shall bear interest at the Bank's Prime Rate
plus one (1%) percent. Interest shall be charged monthly in
arrears on the daily unpaid Revolving Loan balance and shall be
payable on the first business day of each month. Interest shall
be computed on the basis of a 360-day year and paid for actual
days elapsed. Upon demand, whether after the Maturity Date or
otherwise, all amounts due under the Revolving Loan shall bear
interest at a rate two (2%) percent in excess of the otherwise
applicable rate provided for in this Section 2.02.
Section 2.03. Records. The unpaid principal amount of
the Revolving Loan, the unpaid interest, costs and expenses
accrued thereon, the interest rate or rates applicable to such
unpaid principal amount, and the duration of such applicability,
shall at all times be ascertained from the records of the Bank,
which records shall be conclusive absent manifest error.
Section 2.04. Loan Balance. The Bank shall send the
Borrower monthly statements setting forth all amounts due
hereunder as at the end of the prior month and itemizing daily
transaction activity during the prior month. These statements
shall be deemed to be correct and conclusively binding on the
Borrower, unless the Borrower notifies the Bank to the contrary
within fifteen days of its receipt of such statement and
establishes to the satisfaction of the Bank that such statement
is incorrect.
Section 2.05. Right to Charge Account. The Bank, at its
option, may effect the payment of any amount due by charging the
Borrower's account or an account of any affiliate or subsidiary
of the Borrower held with the Bank. This right does not affect
the Borrower's obligation hereunder to make timely payments or
require the Bank to exercise such option.
Section 2.06. Advances, Conditions Precedent to Advances
and Procedures.
(a) Upon the terms and subject to the conditions herein
set forth, the Bank may from time to time make advances to the
Borrower under the Revolving Loan up to an aggregate principal
amount at any one time outstanding not to exceed the Commitment
Amount. Advances to the Borrower hereunder shall be made by the
Bank for deposit in one or more checking accounts ("Cash
Accounts") which Borrower shall maintain with the Bank.
<PAGE> 9
(b) The Borrower shall give the Bank written or facsimile
notice of each proposed advance no later than 11:30 A.M. on the
day in which such proposed advance is to be made. Each such
notice of proposed advance shall specify the date and the amount
of the requested advance, and shall be accompanied by (i) a
completed Borrower Base Certificate in the form of Exhibit 2.06
attached hereto, and (ii) an accounts receivable aging report.
In the event that it approves a requested advance, the Bank
shall make such advance by crediting the Borrower's Cash
Accounts in the amount thereof as set forth herein.
(c) The Borrower acknowledges and agrees that the Bank
may, in its sole and unfettered discretion, make or refuse to
make any advances under the Revolving Loan and, to the extent
that any advance request is considered by the Bank, it will be
subject, among other things, to the following conditions
precedent being met: (i) that the Borrower has complied with
all provisions contained herein; (ii) the continued truth and
accuracy of all representations and warranties contained herein;
(iii) the absence of any enumerated Events of Default; and (iv)
the issuance or securing of such other approvals, opinions and
documents as the Bank may reasonably request.
Section 2.07. Repayment of Revolving Loan Overadvance.
It is the intention of the Borrower and the Bank that the
outstanding principal amount of the Revolving Loan shall at no
time exceed the Commitment Amount. If, at any time, an excess
shall for any reason exist, the Borrower shall repay to the Bank
forthwith, without notice or demand, such amount as shall be
necessary to eliminate such excess.
Section 2.08. Facility Fee. The Borrower agrees to pay
to the Bank a facility fee (the "Facility Fee") of Six Thousand
Five Hundred and 00/100 ($6,500.00) Dollars, payable on or
before the date of this Agreement.
ARTICLE III. COLLATERAL
Section 3.01. Security Interest. To secure the payment
and performance of all Obligations of the Borrower to the Bank,
the Borrower has granted to the Bank a continuing security
interest in, inter alia, all of its inventory, machinery,
equipment, goods, contract rights, accounts, fixtures,
documents, instruments, money, deposit accounts, chattel paper,
general intangibles and other personal property, both presently
existing and hereafter acquired or arising, and all cash and
non-cash proceeds (including proceeds of insurance policies,
<PAGE> 10
payable by reason of loss or damage to the foregoing collateral)
and products thereof (collectively, the "Collateral"). This
continuing security interest is evidenced by a Security
Agreement (the "Security Agreement"), dated of even date
herewith.
Section 3.02. Stock Pledge. To further secure the
payment and performance of all Obligations of the Borrower to
the Bank, the Borrower has pledged to the Bank its capital stock
in Dacon Electronics, PLC. This pledge is evidenced by a Stock
Pledge Agreement (the "Pledge Agreement"), dated of even date
herewith.
Section 3.03. Affiliate Security Interests. To further
secure the payment and performance of all Obligations to the
Bank, the Guarantors shall secure their guarantees of such
obligations by granting the Bank a continuing security interest
in all of their assets.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Agreement, the
Borrower hereby represents and warrants as follows:
Section 4.01. Organization. The Borrower is a
corporation duly organized, validly existing and in good
standing under the Laws of the State of New York; and the
Borrower has the corporate power and authority to own its own
properties and assets and to carry on its business as now being
conducted, and is qualified to do business in every
jurisdiction wherein such qualification is necessary, which
jurisdictions are listed on Schedule 4.01.
Section 4.02. Authority of Borrower. The Borrower has
the corporate power and authority, and has taken all requisite
corporate action, to execute, deliver and perform this
Agreement, to borrow hereunder, and to execute and deliver all
documents and instruments required to be furnished by the
Borrower hereunder.
Section 4.03. Subsidiaries/Business Affiliates/Trade
Names. Schedule 4.03 sets forth a list of all subsidiaries,
corporate affiliates and unincorporated business affiliates of
the Borrower, their respective jurisdictions of incorporation
and/or operation and the basis for their affiliation as of the
date hereof. Each subsidiary and corporate affiliate of
Borrower, is a corporation duly organized, validly existing and
<PAGE> 11
in good standing under the Laws of its jurisdiction of
incorporation, has the lawful power to own its properties and to
engage in the business it conducts and is qualified and in good
standing as a foreign corporation in each jurisdiction in which
the nature of its business or the property owned by it requires
such qualification. The states in which each such subsidiary
and corporate affiliate is qualified to do business are also
listed in Schedule 4.03. All of the issued and outstanding
shares of the capital stock of each subsidiary and corporate
affiliate have been duly and validly authorized and issued and
are fully paid and nonassessable, and no options or rights have
been granted for the sale or other disposition of such shares of
stock. Neither the Borrower nor any of its subsidiaries,
corporate affiliates or unincorporated business affiliates
operates or does business under any assumed, trade or fictitious
name, except as set forth in Schedule 4.03. The addresses of
the places of Borrower's, and its subsidiaries, corporate
affiliates and unincorporated business affiliates' businesses
are also listed in Schedule 4.03.
Section 4.04. Binding Effect. The execution, delivery
and performance of this Agreement, and all such other
agreements, documents and instruments as may be required
hereunder, will not violate any Laws, the Certificate of
Incorporation or Bylaws of the Borrower and will not conflict
with or violate, result in a breach of or constitute a default
under, any indenture, agreement or other instrument to which the
Borrower is a party or by which Borrower or any of its
properties or assets are bound, or result in the creation or
imposition of any lien, charge or encumbrance of any nature
whatsoever upon any of the properties or assets of the Borrower
or constitute grounds for the acceleration of any performance or
compliance obligation of the Borrower under any such indenture,
agreement or instrument. When so executed and delivered, this
Agreement, and all other related agreements, documents and
instruments, shall constitute the legal, valid and binding
obligations of the Borrower enforceable in accordance with their
terms.
Section 4.05. Absence of Adverse Change; Financial
Statements. There have been no material adverse changes in
either the Borrower's consolidated or nonconsolidated financial
condition or operations since December 31, 1994, the date of the
Financial Statements. The Financial Statements are correct and
complete, and fairly present the financial condition and
operations of the Borrower, and its consolidated entities as at
December 31, 1994, and for the year then ended, and were
prepared in accordance with generally accepted accounting
<PAGE> 12
principles applied on a consistent basis with prior fiscal
years.
Section 4.06 Status of Collateral. Borrower has good and
marketable title to its business premises and its accounts,
inventory, machinery, equipment, goods, contract rights,
fixtures, instruments, money, deposit accounts, chattel paper,
general intangibles, documents and such other of its property
and assets which individually or in the aggregate are material
to the business of the Borrower, and none of such properties or
assets are subject to any lien, lease, charge or encumbrance,
other than those in favor of the Bank or described in Schedule
4.06 hereto.
Section 4.07. Litigation. Except as listed and described
in Schedule 4.07 attached hereto, there is no litigation or
administrative investigation or proceeding pending or threatened
against the Borrower, nor is the Borrower aware of any facts
which justify the institution of such litigation or proceeding,
whether or not covered by insurance, and the Borrower is not in
default with respect to any outstanding judgment, writ, order or
decree issued by any court or governmental agency. Schedule
4.07 sets forth the maximum liability, penalty or damages that
may be or has been incurred by Borrower in respect of each
enumerated litigation, investigation, proceeding, judgment,
writ, order or decree. Unless otherwise indicated in Schedule
4.07, the Borrower has insurance which will provide full
coverage for any awards or judgments which may result or has
resulted from any actions or proceedings against the Borrower
described in such schedule. For purposes of this Section 4.07
only, the term "threatened" shall mean that a potential claimant
has manifested to Borrower an awareness and present intention to
assert a claim or assessment.
Section 4.08. Absence of Default. The Borrower is not in
default in any material respect in the performance of or
compliance with any covenant or condition of any material
agreement or obligation to which the Borrower is a party or by
which it is bound.
Section 4.09. Taxes. The Borrower has filed or caused to
be filed all federal, state, local and foreign tax returns which
are required to be filed, and has paid or caused to be paid all
taxes as shown on such returns or on any assessment received by
the Borrower, to the extent that such taxes have become due, and
the Borrower has no knowledge of any material liability (or
basis therefor) for any tax to be imposed on the
<PAGE> 13
Borrower, or any of its assets or properties for which adequate
provision has not been made in the Financial Statements.
Section 4.10. ERISA Compliance. The Borrower and each of
its affiliates is in compliance in all material respects with
all applicable provisions of ERISA. Except as otherwise set
forth in Schedule 4.10 attached hereto, neither a reportable
event nor a prohibited transaction has occurred and is
continuing with respect to any employee benefit plan established
or maintained by or on behalf of the Borrower; no notice of
intent to terminate any such plan has been filed, nor has any
such plan been terminated; no circumstances exist which
constitute grounds entitling the Pension Benefit Guaranty
Corporation ("PBGC") to institute proceedings to terminate, or
appoint the trustee to administer, any such plan, nor has the
PBGC instituted any such proceedings; neither the Borrower nor
any affiliate has completely or partially withdrawn from any
multiemployer/employee benefit plan; the Borrower and each of
its affiliates has met its minimum funding requirements under
ERISA with respect to all of its and/or their employee benefit
plans; and neither the Borrower nor any of its affiliates has
incurred any liability to the PBGC under ERISA, outside of the
ordinary course of the administration of its and/or their
employee benefit plans.
Section 4.11. Hazardous Wastes. To the best of its
knowledge, the Borrower has never discharged, generated, used or
stored any hazardous wastes as defined in the Code of Federal
Regulations (hereinafter "CFR") at 40 CFR Part 261 or in
Connecticut General Statutes Section 22a-115 and regulations
thereunder, or any other substance that may pose a present or
potential hazard to human health or the environment when
improperly disposed of, treated, stored, or generated, except as
otherwise listed on Schedule 4.11 attached hereto. Any and all
discharges and releases of any substances to the air, ground
and/or water caused by, attributable to, or in any way related
to the Borrower, as identified in Schedule 4.11, have at all
times been within all applicable limits and restrictions set by
applicable laws, or by applicable permits or other similar
grants of governmental approval or permission. Except as
otherwise set forth in Schedule 4.11, and to the best of its
knowledge, none of the Borrower's property or property adjacent
thereto, has ever been the site of any lagoons, surface
impoundments or similar uses; nor of a dump, landfill or other
waste treatment facility; nor of a dry cleaning facility,
furniture stripping facility, gasoline station, auto body repair
shop, or painting facility. To the best of its knowledge,
neither the Borrower, nor any person controlled by the Borrower,
has ever been named in any clean-up order or other order of the
United States Environmental Protection Agency, the Department
<PAGE> 14
of Environmental Protection of Connecticut, or any other state
agency.
Section 4.12. Capital Stock. To the best of Borrower's
knowledge, schedule 4.12 sets forth the beneficial owners
holding in excess of five (5%) percent of the Borrower's capital
stock.
Section 4.13. Accuracy of Disclosure. Neither this
Agreement nor any document, certificate, agreement, schedule,
exhibit or writing supplied to the Bank pursuant to this
Agreement or with respect to the transactions contemplated
herein, contains any untrue statement of material fact, or omits
to state any material fact necessary to make the statements
herein or therein not misleading.
Section 4.14. Other Material Agreements. The Borrower is
not a party to any agreement, indenture or other instrument, nor
is it subject to any other corporate restriction, which now or
in the future may have a material adverse effect on its
business, properties, assets, operations or condition, financial
or otherwise. The Borrower is not a party to, nor is it bound
by, any contract, agreement or instrument, or subject to any
restrictions, materially affecting its ability (financial or
otherwise) to perform the Obligations, or any other covenant,
agreement or undertaking contemplated hereunder.
Section 4.15. Compliance with Laws. The Borrower, to the
best of its knowledge, has complied with all applicable Laws in
respect of its business, including but not limited to (i) any
restrictions, specifications or other requirements pertaining to
products that the Borrower manufactures or sells or to the
services it performs; and (ii) the use, maintenance and
operation of the real and personal properties owned or leased by
it in the conduct of its business.
Section 4.16. Trademarks, Patents, Etc.. The Borrower,
to the best of its knowledge, possesses all the trademarks,
trade names, copyrights, patents, licenses, or rights therein,
adequate for the conduct of its business as now conducted and
presently proposed to be conducted, without conflict with the
material rights or claimed rights of others.
Section 4.17. Survival of Representations. All
representations made in connection herewith shall be deemed to
be relied upon by the Bank, notwithstanding any investigation
hereinbefore or hereinafter made and shall survive as long as
any of the Obligations remain outstanding. Upon full
satisfaction of all Obligations and the termination of the
<PAGE> 15
Revolving Loan, whether arising under this Agreement or any
other written agreement with the Bank, the representations and
warranties of the Borrower shall terminate and be of no further
force and effect. By requesting the Bank for a loan or upon
securing an advance hereunder, the Borrower shall be deemed to
warrant that all of the representations and warranties contained
in this Agreement are true and correct as of the date of such
request and/or advance.
ARTICLE V. COVENANTS AND CONTINUING AGREEMENTS
Section 5.01. Affirmative Covenants. The Borrower hereby
covenants and agrees, from the date hereof and until payment in
full of the principal of, and the interest, costs and expenses
on, the Revolving Loan and the termination of this Agreement,
unless the Bank shall otherwise consent in writing, that it
shall perform and observe or cause to be performed or observed,
the following covenants and agreements:
(a) Punctual Payment. Pay the principal of, and
interest, costs and expenses, on the Revolving Loan at the
place and in the manner stated herein.
(b) Payment of Taxes, etc. Pay all taxes,
assessments, governmental charges or levies imposed upon
the Borrower or upon its income or profits or upon any
properties belonging to it, prior to the date on which
interest or penalties attach thereto, and all lawful
claims which, if unpaid, might become a lien or charge
upon any properties of the Borrower, provided that the
Borrower, shall not be required to pay any such tax,
assessment, charge, levy or claim which is being contested
in good faith and by proper proceedings and for which it
shall have set aside on its books such reserves as the
Bank may deem necessary with respect to any such tax,
assessment, charge, levy or claim so contested; and,
furthermore, deposit all payroll taxes with the Bank.
(c) Financial Information: Furnish to the Bank:
(i) Within fifteen (15) days after the end of each
calendar month, and with each request for an advance, a
Borrowing Base Certificate in the form of Exhibit 2.06
attached hereto, and an accounts receivable aging report
as of the end of such month.
(ii) Within forty-five (45) days after the
expiration of each fiscal quarter, consolidated and
PAGE <16>
consolidating balance sheets of the Borrower and its
subsidiaries, as of the close of such quarter, and
consolidated and consolidating statements of income,
retained earnings, and cash flows for such quarter, all
internally prepared in conformity with generally accepted
accounting principles, applied on a basis consistent with
that of the preceding quarter (or accompanied by
disclosure of the effect on the financial position or
results of operations of the Borrower or its subsidiaries
of any change in the application of the accounting
principles during such period).
(iii) Within forty-five (45) days after the
expiration of each fiscal quarter of the Borrower, a copy
of the Borrower's Form 10-Q for such quarter, as filed
with the United States Securities and Exchange Commission.
(iv) Within ninety (90) days after the close of
each fiscal year of the Borrower, consolidated and
consolidating balance sheets of the Borrower and its
subsidiaries as of the close of such fiscal year and
consolidated and consolidating statements of income and
cash flows for such fiscal year, prepared in conformity
with generally accepted accounting principles, applied on
a basis consistent with that of the preceding fiscal year
(or accompanied by disclosure of the effect on the
financial position or results of operations of the
Borrower or its subsidiaries of any change in the
application of the accounting principles during that
year), and accompanied by an audit report of Ernst &
Young, LLP or such firm of independent certified public
accountants as is selected by the Borrower and acceptable
to the Bank.
(v) Within ninety (90) days after the close of
each fiscal year of the Borrower, a copy of the Borrower's
Form 10-K for such year, as filed with the United States
Securities and Exchange Commission.
(vi) With each of the reports and financial
statements required by the foregoing paragraphs (ii) and
(iv), a certificate of the President of Borrower stating
he has reviewed the provisions of this Agreement and that
a review of the activities of the Borrower during such
period or as of such date, as the case may be, has been
made by him or under his supervision with a view to
determining whether the Borrower has kept, observed,
<PAGE> 17
performed and fulfilled all of its obligations under this
Agreement, and to the best of his knowledge, the Borrower
has observed and performed each and every undertaking
contained in this Agreement and is not in default in the
observance or performance of any of the terms and
conditions hereof or, if the Borrower shall be in default,
specifying all such defaults in reasonable detail.
(vii) On or before December 31, 1995, consolidated
and consolidating projections of income and cash flow of
the Borrower for the fiscal year ending December 31, 1996.
(viii) Upon reasonable prior notice, the Borrower
will supply the Bank with such other financial information
as the Bank may reasonably request (e.g., order backlog
projections, inventory breakdown).
(d) Documentation of Accounts. Upon request by the
Bank, the Borrower will furnish the following items to the
Bank: (a) copies of invoices to its customers, which shall
specify the location at which the goods and/or services
were furnished or performed; (b) evidence of shipment or
delivery; and (c) such further schedules, documents and/or
information relating to accounts as the Bank may require.
The items to be provided under this Section are to be in
form satisfactory to the Bank and are to be delivered to
the Bank from time to time solely for the Bank's
convenience in maintaining records of the Collateral.
Borrower's failure to give any of such items to the Bank
shall not affect, terminate, modify or otherwise limit the
Bank's lien or security interest in the Collateral.
(e) Verification of Accounts. At any time, and
without prejudice to any of the Bank's rights and remedies
under this Agreement, the Security Agreement or any other
related documents or agreements, the Bank shall have the
right to instruct the Borrower's accountants, at
Borrower's expense, to verify the balances outstanding on
any or all of the accounts. On the Bank's instructions,
the accountants will send notices to the account debtors
in the customary manner without revealing the Bank's
security interest, and all verifications shall be
transmitted by said accountants to the Bank, at the
expense of the Borrower. If the Borrower changes its
accounting firm, the Borrower shall notify the Bank by
certified mail, prior to effecting such change, of the
name and address of the new accounting firm. The Borrower
<PAGE> 18
shall not change its accounting firm unless the new
accounting firm is approved by the Bank, which approval shall
not be unreasonably withheld or delayed.
(f) Insurance. Maintain, with responsible
insurers, liability insurance in such amounts and covering
such risks as are usually carried by companies engaged in
the same or similar business or in such amounts covering
such risks as the Bank shall reasonably request. The
Borrower will keep the Collateral insured for the Bank's
benefit against hazards (including extended coverage, and
vandalism, theft, fire and malicious mischief coverage) to
the full insurable value of the Collateral. In addition,
the Borrower shall maintain comprehensive general
liability insurance, business interruption insurance,
workers' compensation insurance and such other additional
insurance as the Bank may reasonably request. The
Borrower shall obtain and deliver to the Bank appropriate
certificates of insurance describing such coverages and
evidencing the Bank's designation as a loss payee. All
policies shall contain an agreement by the insurer that
the policy is not to be cancelled or materially changed
for any reason without at least thirty (30) days prior
written notice to the Bank, unless the effect of such
change would extend or increase coverage under the
policies. The Borrower appoints the Bank as its attorney
for obtaining, adjusting and cancelling insurance and
endorsing any settlement relating to insurance on the
Borrower's property.
(g) Compliance with Laws and Agreements. Comply
with all applicable Laws, agreements, obligations, orders
or decrees, non-compliance with which could materially and
adversely affect its business or financial condition.
(h) Litigation. Notify the Bank in writing
immediately upon commencement of (i) any litigation or
proceeding to which the Borrower is a party, if an adverse
decision therein would require it to pay more than One
Hundred Thousand and 00/100 ($100,000.00) Dollars or
deliver assets, the value of which exceeds such sum
(whether or not covered by insurance), and (ii) the
institution of any other suit, proceeding or governmental
investigation involving the Borrower that might have a
material, adverse effect upon the operation, financial
condition, property or business of Borrower.
<PAGE> 19
(i) Notice of Default. Notify the Bank in writing
as soon as possible and, in any event, within five (5)
business days after the occurrence of an Event of Default
as defined in this Agreement or any event which, with the
giving of notice or passage of time or both, could become
an Event of Default, by providing the Bank with a
statement of an officer of the Borrower setting forth the
details of such event.
(j) Indebtedness. Pay all of its Indebtedness
promptly and in accordance with the terms of the governing
instrument, document or agreement, except to the extent
that a subordination of certain indebtedness is required
by the terms of this Agreement or any related agreement.
(k) Conduct of Business. Maintain the Borrower's
corporate existence, rights, and franchises; continue to
engage only in the types of business presently engaged in
by it; collect its accounts and sell its inventory only in
the ordinary course of business; maintain such records and
books of account as are consistent with sound business
practices; and notify the Bank thirty (30) days in advance
of any change in location of any of its place or places of
business or the establishment of any new, or the
discontinuance of any existing place of business.
(l) Pension Plan Compliance. Fund all employee
benefit plans, if any, in accordance with no less than the
minimum funding standards of Section 412 of the Internal
Revenue Code and of Section 302 of ERISA, discharge all
other duties imposed under ERISA, and promptly advise the
Bank of the occurrence of any reportable event or
prohibited transaction as such terms are defined in ERISA
with respect to such plans. In addition, the Borrower
shall inform the Bank of all proceedings, including but
not limited to terminations, instituted in connection with
such plans, whether instituted by the Borrower or by any
other party. Borrower shall also inform the Bank promptly
of the adoption of any tax qualified employee benefit
plan.
(m) Notification of Changes in Financial Condition
and Affiliate Loans. Promptly notify the Bank of any
event or condition which could have a material, adverse
effect upon the financial condition or operations of the
Borrower; and promptly notify the Bank of any officer,
shareholder or affiliate loans by the Borrower and
repayments in respect thereof.
<PAGE> 20
(n) Notice to Shareholders. Furnish to the Bank
copies of all correspondence, notices, reports,
communications or other documents sent by the Borrower to
its shareholders within three (3) days after such
documents are mailed or otherwise made available to
shareholders.
(o) Other Information. From time to time, furnish
such additional information as the Bank shall request.
(p) Bank Accounts. Maintain the Borrower's
domestic principal bank account or accounts with the Bank.
(q) Additional Documents. At the Borrower's
expense, execute and deliver all additional documents,
assurances and instruments, and take such further action,
as the Bank may request to carry out the purpose and
intent of this Agreement.
(r) Books and Records. The Borrower shall:
(i) Maintain, at all times, true and complete
books, records and accounts in which true and correct
entries shall be made of its transactions in accordance
with generally accepted accounting principles consistently
applied and consistent with those applied in the
preparation of the financial statements referred to in
Section 5.01(c) hereof, and
(ii) by means of appropriate quarterly entries,
reflect in its accounts and in all financial statements
furnished pursuant to Section 5.01(c) proper liabilities
and reserves for all taxes and proper provision for
depreciation and amortization of its properties and bad
debts, all in accordance with generally accepted
accounting principles, consistently applied, as above
described.
(s) Assets. The Borrower shall keep its assets in
good repair, working order and condition (except obsolete
property not yet disposed of) and, from time to time, make
all appropriate and proper repairs thereto and
improvements thereon.
(t) Inspection by Bank. The Borrower shall allow
any representative of the Bank to visit and inspect any of
<PAGE> 20
the properties or premises of the Borrower and to examine
and audit the books of account and other records and files
of the Borrower at such times and as often as the Bank may
request. Any inspections, examinations and audits
conducted hereunder are solely for the protection of the
Bank and no action or inaction of the Bank shall
constitute any representation by the Bank that the
Borrower is in compliance with the terms of this
Agreement, or that the Bank approves of Borrower's
affairs, business, finances or accounts. The Borrower
shall reimburse the Bank for the costs of any inspection,
examination or audit.
Section 5.02. Negative Covenants. The Borrower hereby
covenants and agrees, from the date hereof until payment in full
of the principal of, and interest, costs and expenses on, the
Revolving Loan and the termination of this Agreement, unless the
Bank shall otherwise consent in writing, which consent shall not
be unreasonably withheld, that it shall not, directly or
indirectly:
(a) Indebtedness. Permit to exist, incur, create
or assume any Indebtedness on account of borrowed money,
except (i) Obligations to the Bank; and (ii) any existing
Indebtedness described in the Financial Statements.
(b) Sale of Assets, Dissolution, or Merger. Wind
up, liquidate or dissolve its affairs, convey, sell, lease
or otherwise dispose of (whether in one transaction or in
a series of transactions) all or substantially all of its
properties or assets, whether now or hereafter acquired,
or enter into any transaction of comparable effect or any
merger or consolidation.
(c) Guaranties. Guaranty, endorse or otherwise in
any way become liable or responsible for the Indebtedness
of any other person, whether directly or indirectly,
except for (i) routine endorsements of negotiable
instruments for collection or deposit in the ordinary
course of business, (ii) any guaranty or similar
contractual arrangement for the benefit of the Bank, or
(iii) any guaranty or similar contractual arrangement
described in the Financial Statements.
(d) Liens. Incur, create, assume or permit to
exist any mortgage, lien, encumbrance, pledge or security
interest upon or in respect of any of its assets, whether
<PAGE> 22
now owned or hereafter acquired, except (i) for purchase
money security interests, (ii) for mortages, liens,
encumbrances, pledges or security interests disclosed in
the Financial Statements, and (iii) as contemplated and/or
permitted herein.
(e) Loans, Advances and Investments. Make or have
outstanding any loan or advances to, or own or acquire any
securities of, any person, including but not limited to
any subsidiary, officer or affiliate of Borrower, except
as otherwise disclosed in the Financial Statements.
(f) Regulation U Compliance. Directly or
indirectly apply any part of the proceeds of the Revolving
Loan to the purchasing or carrying of any margin stock
within the meaning of Regulation U of the Board of
Governorns of the Federal Reserve System or any
regulations, interpretations or rulings thereunder.
(g) Affiliates. With respect to any affiliate or
subsidiary, enter into any transaction with such affiliate
or subsidiary other than an arm's-length transaction in
the ordinary course of business upon terms substantially
similar to and no less favorable than that which the
Borrower would obtain in a similar transaction between the
Borrower and a third party unrelated to the Borrower; or
create, form and/or organize any new subsidiary or
affiliated entity.
(h) Current Ratio. Permit the ratio of (i)
Borrower's consolidated current assets, to (ii) Borrower's
consolidated current liabilities, to be less than 1.75 to
1.00 as at the end of any fiscal year, as determined in
accordance with generally accepted accounting principles.
(i) Debt to Capital Funds. Permit the ratio of (i)
Borrower's Indebtedness, as reflected in its consolidated
balance sheet, less subordinated debt, to (ii) Capital
Funds, to exceed 1.75 to 1.00, as determined in accordance
with generally accepted accounting principles.
(j) Maximum Capital Funds. Permit Borrower's
consolidated Capital Funds to fall below $4,800,000.00 as
at the close of its fiscal year ending December 31, 1995.
(k) No Losses. Incur or suffer a loss, net of
expenses, taxes and proper income charges (including cost
of goods sold, marketing and general administrative
expenses and all other payments made in and directly
related to, and all charges properly accrued in respect
of, such quarter under generally accepted accounting
principles), for any two (2) consecutive fiscal quarters,
<PAGE> 23
either on a consolidated or nonconsolidated basis, as
reflected in the financial statements submitted to the
Bank pursuant to Section 5.01(c)(ii) herein. For purposes
of this subsection, income or loss shall be calculated in
a manner that excludes the following items from gross
revenues: (i) gains in excess of losses resulting from
the sale, exchange, conversion or other disposition of
assets that are not current assets; (ii) gains resulting
from the write-up or write-down of assets, other than
normal quarter-end adjustments; (ii) gains resulting from
the acquisition, at a discount, by the Borrower or any
affiliate thereof, of any bonds, debentures, promissory
notes or other evidences of indebtedness of the Borrower;
and (iv) gains attributable to foreign currency
translation or transactions.
(l) Net Income. Permit net income of Borrower on a
nonconsolidated basis to be less than $224,000.00 for the
six-month period ended June 30, 1995, $303,000.00 for the
nine-month period ending September 30, 1995, and
$315,000.00 for the fiscal year ending December 31, 1995.
For purposes of this subsection, net profits shall be
calculated in the same manner as set forth in subsection
5.02(k) above.
(m) Eligible Receivables. Permit the Obligations
to at any time exceed the product of (i) Eligible
Receivables, and (ii) .70.
(n) Cash Dividends. Permit any cash dividends
and/or similar payments by or on behalf of the Borrower to
any of its shareholders.
Section 5.03. Survival. All covenants and continuing
agreements contained in this Article V shall survive as long as
any amounts are due and owing under this Agreement and the
Revolving Loan has not been terminated.
VI. DEFAULT
Section 6.01. Events of Default. The occurrence of any
one or more of the following events shall constitute an event of
default hereunder (herein referred to individually as an "Event
of Default", and collectively as "Events of Default"):
(a) Failure to Pay. The Borrower shall fail to pay
any installment of principal or interest when due
hereunder, whether by maturity or otherwise, or pay any
<PAGE> 24
other amount when due to the Bank under this Agreement,
the Security Agreement or any document, agreement or
instrument delivered pursuant to this Agreement or
otherwise.
(b) Failure to Perform. The Borrower or any of the
Guarantors shall fail to observe or perform any other
term, covenant or provision to be observed or performed by
them under this Agreement, the Security Agreement, the
written guarantees of the Guarantors, or any other
agreements, instruments or documents required hereunder or
thereunder, and such failure shall continue for fifteen
(15) business days after (i) receipt by the Borrower
and/or Guarantor of notice of such failure from the Bank
or (ii) the Bank is notified of such failure by the
Borrower or any of the Guarantors or should have been so
notified under the provisions of Section 5.01(i) hereof,
whichever is earlier.
(c) Default in Material Debt. The Borrower or any
of the Guarantors shall fail to pay any material
Indebtedness due to any third party and such failure shall
continue beyond any applicable grace period in the
governing document, or the Borrower or any of the
Guarantors shall suffer to exist uncured any event of
default under any other material agreement or instrument
including, but not limited to, any guarantee to which any
such person is a party or by which they are bound.
(d) Uninsured Loss. There shall occur any
material, uninsured damage or any loss or destruction to
any property or assets securing the Obligations.
(e) False or Misleading Financial Statement or
Other Statement. The Financial Statements or any other
statement, information, representation, warranty or
certificate made or furnished by the Borrower and/or the
Guarantors in connection with this Agreement or as an
inducement to the Bank to enter into this Agreement, or
any separate statement or document to be delivered
hereunder to the Bank, heretofore or hereafter, shall
prove to have been materially false or misleading when
made.
(f) Insolvency. The Borrower and/or any of the
Guarantors shall become insolvent or admit its inability
to pay its debts as they mature or shall make an
assignment for the benefit of its creditors.
<PAGE> 25
(g) Bankruptcy. A proceeding in bankruptcy or for
reorganization of the Borrower and/or any of the
Guarantors for the readjustment of any of their respective
debts under the Bankruptcy Code, as amended, or any part
thereof, or under any other Laws, whether state or
federal, for the relief of debtors now or hereafter
existing, shall be commenced by the Borrower and/or any of
the Guarantors or shall be commenced against the Borrower
and/or any of the Guarantors; provided that if such an
action is instituted against the Borrower and/or any of
the Guarantors, it shall not be an Event of Default if
such action is discharged within sixty (60) days.
(h) Receiver or Trustee. A receiver or trustee
shall be appointed for the Borrower and/or any of the
Guarantors or for any substantial part of their respective
assets, or any proceeding shall be instituted for the
dissolution of the Borrower and/or any of the Guarantors
or the full or partial liquidation of the assets of the
Borrower and/or any of the Guarantors, and such receiver
or trustee shall not be discharged within thirty (30) days
of his appointment, or such proceeding shall not be
discharged within thirty (30) days of its commencement;
provided that the thirty (30) day period provided herein
shall not apply to appointments or actions instituted by
the Borrower and/or any of the Guarantors.
(i) Judgment Creditor. A judgment creditor of the
Borrower and/or any of the Guarantors shall obtain
possession of any of its assets by any means including,
without limitation, levy, restraint, or replevin.
(j) Validity. The validity or enforceability of
this Agreement, the Security Agreement, the written
guarantees of the Guarantors, the security agreements
issued by the Guarantors, or any other agreement or
instrument contemplated hereunder or thereunder shall be
contested by the Borrower and/or any of the Guarantors, or
the Borrower and/or any of the Guarantors shall deny any
further liability or obligation hereunder or thereunder or
the Bank determines there is a commercially reasonable
basis for such a contention and the Borrower and/or any of
the Guarantors, as the case may be, fails or refuses to
remedy such impairment.
<PAGE> 26
(k) Change in Business. The Borrower and/or any of
the Guarantors shall suffer a material adverse change in its
business, shall suspend or discontinue a significant part of its
business or shall materially change the nature of its business.
(l) Government Action. Any governmental agency or
instrumentality seizes, appropriates, condemns or occupies
all or a substantial part of the properties of Borrower,
and/or any of the Guarantors, or interferes in any
substantial manner with Borrower's and/or Guarantors'
respective business.
(m) Deemed Insecurity. The Bank shall at any time
deem itself insecure for any reason.
Section 6.02. Demand Facility. THE BORROWER AGREES AND
ACKNOWLEDGES THAT THE REVOLVING LOAN IS A DEMAND LOAN, AND THAT
PAYMENT THEREUNDER MAY BE DEMANDED BY THE BANK AT ANY TIME FOR
ANY REASON. ACCORDINGLY, THE FOREGOING EVENTS OF DEFAULT ARE
INCLUDED AS A REFERENCE FOR THE BORROWER, INTENDED SOLELY TO
DELINEATE THE TYPES OF EVENTS THAT WILL RESULT IN DEMAND BY THE
BANK FOR PAYMENT OF THE OBLIGATIONS.
Section 6.03. Remedies. Upon the occurrence of an Event
of Default, as defined in Section 6.01 hereof, and demand by the
Bank for the immediate payment of the Obligations (or otherwise
upon demand for immediate payment of the Obligations for any
reason and at any time), the Bank may, without further notice,
do any one or more of the following at its sole and unfettered
discretion:
(a) Refuse to make any further advances under the
Revolving Loan;
(b) Protect and enforce the Bank's rights by a suit
in equity, by an action in law, or both, whether for specific
performance of any covenant or agreement contained in this
Agreement, the Security Agreement, or any other document,
instrument or agreement;
(c) Set off, in such order as the Bank may
determine in its sole and unfettered discretion, any and all of
the unpaid principal of and interest on the Revolving Loan and
any or all of the other Obligations of Borrower and/or the
Guarantors to Bank, now existing or hereafter created, against
any or all of the property of Borrower and/or any Guarantor in
the Bank's possession at or after the Event of Default and/or
<PAGE> 27
demand, regardless of the capacity in which the Bank possesses
such property, including without limitation, any balance or
share in any demand, time, savings, passbook, trust, agency or
escrow account, and including any property in transit to or from
the Bank. The Bank shall have the right of set off against any
such property of Borrower and/or any of the Guarantors, although
the obligations and liabilities with respect to which such set
off shall have occurred may be then contingent or unmatured; and
(d) Have and exercise each and every right and
remedy granted to the Bank under the terms of this Agreement,
the Security Agreement, and any other document, instrument or
agreement related thereto (and notwithstanding that default
under such document or instrument containing such right or
remedy shall not have occurred), together with every right or
remedy now or hereafter available to the Bank at law or in
equity, including, without limitation, rights and remedies
granted to a secured party under the Connecticut Uniform
Commercial Code.
Section 6.04. Remedies Not Exclusive. No remedy
conferred upon or reserved to the Bank hereunder or under the
documents and instruments evidencing the Obligations shall be
deemed to be exclusive of any other available remedy or
remedies. Each such remedy shall be distinct, separate, and
cumulative, shall not be deemed to be inconsistent with or in
exclusion of any other available remedy, may be exercised in the
discretion of the Bank at any time, in any manner and in any
order, and shall be in addition to and separate and distinct
from any other remedy given to the Bank hereunder, or under the
documents and instruments evidencing the Obligations, or now or
hereafter existing in favor of the Bank, at law, in equity or by
statute. The Bank shall also have the right to foreclose any
mortgage or security interest or proceed under any guaranty or
other agreement pertaining to the Obligations without also being
required to foreclose any other mortgage or security interest or
proceed against any other guaranty or agreement and without
thereby waiving or prejudicing its right to foreclose any other
such mortgage or security interest or proceeding under any other
such guaranty or agreement or impairing any of its rights
thereunder.
ARTICLE VII. MISCELLANEOUS
Section 7.01. Notice. All notices, demands and other
communications required to be given pursuant to or contemplated
by this Agreement shall be deemed effectively delivered or
<PAGE> 28
given when manually delivered or when indicated to have been
delivered by a return receipt and mailed within the United
States by registered or certified mail, first class mail,
postage prepaid, addressed to the intended party at the address
as set forth below (or at such other address as the party shall
hereinafter specify to the other party in writing):
To the Bank:
People's Bank
350 Bedford Street
Stamford, Connecticut 06901
Attn: Mr. Frank Cory
Assistant Vice President
With a copy to:
David A. Greenberg, Esq.
Trager and Trager, P.C.
1305 Post Road
P.O. Box 954
Fairfield, Connecticut 06430-0954
To the Borrower:
Cognitronics Corporation
3 Corporate Drive
Danbury, Connecticut 06810
Attn: Garrett Sullivan
Treasurer and Chief Financial Officer
With a copy to:
Brian T. O'Connor, Esq.
Diserio, Martin, O'Connor & Castiglioni
One Atlantic Street
Stamford, Connecticut 06901
Section 7.02. Construction and Interpretation. The
provisions of this Agreement shall be in addition to those of
any guaranty, pledge or security agreement, note or other
evidence of liability held by the Bank, all of which shall be
construed as complimentary to each other. Nothing herein
contained shall prevent the Bank from enforcing any and all
other notes, guaranties, pledges, mortgages and security
agreements in accordance with their respective terms. In the
event the terms of this Agreement conflict with the terms of any
other agreement, document, or instrument executed and delivered
in connection with the Revolving Loan, then the terms hereof
shall take precedence in resolving such conflict.
<PAGE> 29
Section 7.03. Further Assurances. From time to time, the
Borrower and/or any of the Guarantors will execute and deliver,
or will cause to be executed and delivered, to the Bank such
additional documents and will provide such additional
information as the Bank may reasonably require to carry out the
terms of this Agreement and to be informed of the Borrower's
and/or any of the Guarantors status and affairs.
Section 7.04. Enforcement by the Bank. The Bank shall
have the right at all times to enforce the provisions of this
Agreement and all other agreements, documents and instruments
required hereunder in strict accordance with their terms,
notwithstanding any conduct or custom on the part of the Bank in
refraining from doing so at any time or times. The failure of
the Bank at any time to enforce any rights under such provisions
strictly in accordance with the same shall not be construed as
having created a custom in any way or manner contrary to the
specific provisions of this Agreement or as having in any way or
manner modified or waived the same. All rights and remedies of
the Bank are cumulative and the exercise of any one right or
remedy shall not be deemed to waive or release any other right
or remedy.
Section 7.05. Expenses of the Bank. The Borrower will
pay all expenses, including reasonable fees and expenses of
legal counsel of the Bank and such other experts and consultants
as the Bank shall deem appropriate, incurred in connection with
the preparation, administration, negotiation, amendment,
modification, protection and enforcement of this Agreement and
all other agreements and instruments required hereunder.
Section 7.06. Amendments, Etc. No amendment,
modification, termination, or waiver of any provision of this
Agreement or any agreement, instrument or other document
contemplated hereby, or consent to any departure by the Borrower
or any of the Guarantors therefrom, shall in any event be
effective unless the same shall be in writing and signed by the
Bank, and then such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which
given. No notice to or demand on the Borrower or any of the
Guarantors in any case shall entitle the Borrower or any of the
Guarantors to any other or further notice or demand in similar
or other circumstances.
<PAGE> 30
Section 7.07. Survival of Covenants. All covenants,
agreements, representations and warranties made in this
Agreement and in any certificates delivered pursuant to this
Agreement shall survive the making of the Revolving Loan and
shall continue in full force and effect as long as the
Obligations are outstanding and unpaid.
Section 7.08. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
State of Connecticut. THE BORROWER ACKNOWLEDGES THAT THE
TRANSACTIONS TO WHICH THIS AGREEMENT RELATE ARE COMMERCIAL
TRANSACTIONS. THE BORROWER HEREBY VOLUNTARILY AND KNOWINGLY
WAIVES ITS RIGHTS TO NOTICE AND HEARING UNDER CHAPTER 903a OF
THE CONNECTICUT GENERAL STATUTES, AS AMENDED AND IN EFFECT ON
THE DATE HEREOF, OR AS OTHERWISE ALLOWED BY ANY STATE OR FEDERAL
LAW OR PROCEDURAL RULE WITH RESPECT TO ANY PREJUDGMENT REMEDY OR
OTHER RIGHT OR REMEDY THAT THE BANK MAY ELECT TO USE OR OF WHICH
IT MAY AVAIL ITSELF. THE BORROWER FURTHER WAIVES, TO THE
GREATEST EXTENT PERMITTED BY LAW, THE BENEFITS OF ALL PRESENT
AND FUTURE VALUATION, APPRAISAL, EXEMPTION, STAY, REDEMPTION AND
MORATORIUM LAWS.
Section 7.09. Severability. In case any one or more of
the provisions contained in this Agreement, or any of the
documents or agreements contemplated hereby, should be invalid,
illegal or unenforceable in any respect, the validity, legality,
and enforceability of the remaining provisions contained herein
shall not in any way be affected or impaired thereby.
Section 7.10. Assignment. The rights conferred upon the
Bank by this Agreement shall be automatically extended to and
vested in any assignee or transferee of the Bank upon the
Borrower's receipt of notice of such assignment or transfer;
provided, however, that no such assignment or transfer shall
enlarge the obligations of the Borrower hereunder.
Section 7.11. Counterparts. This Agreement may be
executed in any number of counterparts, each of which shall be
deemed to be an original, but all of which together shall
constitute but one and the same agreement.
Section 7.12. Captions. The articles and section
captions are inserted herein only as a matter of convenience and
for reference, and in no way define, limit or describe the scope
or intent of any such article or section, nor in any way affect
this Agreement.
<PAGE> 31
Section 7.13. Waiver of Jury Trial. THE BORROWER WAIVES
ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO
ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR UNDER ANY
AGREEMENT, INSTRUMENT OR OTHER DOCUMENT CONTEMPLATED HEREBY OR
RELATED HERETO AND IN ANY ACTION DIRECTLY OR INDIRECTLY RELATED
TO OR CONNECTED WITH THE REVOLVING LOAN PROVIDED FOR HEREIN, OR
ANY CONDUCT RELATING TO THE ADMINISTRATION OR ENFORCEMENT OF
SUCH REVOLVING LOAN OR ARISING FROM THE DEBTOR/CREDITOR
RELATIONSHIP OF THE PARTIES HERETO. THE BORROWER ACKNOWLEDGES
THAT THIS WAIVER MAY DEPRIVE IT OF AN IMPORTANT RIGHT AND THAT
SUCH WAIVER HAS KNOWINGLY BEEN AGREED TO BY THE BORROWER.
Section 7.14. Prior Agreements Superseded. Except as
otherwise provided for herein, this Agreement, together with all
agreements and documents concurrently executed, constitutes the
entire understanding and agreement between the parties hereto
and thereto pertaining to the subject matter hereof and thereof
and completely and fully supersedes all prior understandings or
agreements, both written and oral, between the Bank and the
Borrower relating to the subject matter hereof.
Section 7.15. Consent to Jurisdiction and Service of
Process. Any legal action, suit or proceeding arising out of or
relating to this Agreement or the transactions contemplated
hereby may be instituted in any state or federal court in the
State of Connecticut, including without limitation the superior
courts for the judicial districts of Fairfield and
Stamford/Norwalk, and Borrower agrees not to assert, by way of
motion, as a defense or otherwise, in any action, suit or
proceeding, any claim that it is not subject personally to the
jurisdiction of such court, that its property is exempt or
immune from attachment or execution, that the action, suit or
proceeding is brought in an inconvenient forum, that the venue
of the action, suit or proceeding is improper or that this
Agreement or the subject matter hereof may not be enforced in or
by such court. Each party further irrevocably submits to the
jurisdiction of any such court in any such action, suit or
proceeding.
<PAGE> 32
IN WITNESS WHEREOF, the parties hereto have duly executed
this Agreement as of the day and year first above written.
THE BANK: PEOPLE'S BANK
By: Frank Cory
Its: Assistant Vice President
ATTEST: THE BORROWER:
COGNITRONICS CORPORATION
By: Harold F. Mayer By: Garrett Sullivan
Its: Secretary Its: Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 3617
<SECURITIES> 0
<RECEIVABLES> 2940
<ALLOWANCES> 241
<INVENTORY> 2882
<CURRENT-ASSETS> 752
<PP&E> 4017
<DEPRECIATION> 2754
<TOTAL-ASSETS> 14535
<CURRENT-LIABILITIES> 3199
<BONDS> 385
<COMMON> 682
0
0
<OTHER-SE> 7766
<TOTAL-LIABILITY-AND-EQUITY> 14535
<SALES> 13436
<TOTAL-REVENUES> 13436
<CGS> 6310
<TOTAL-COSTS> 6310
<OTHER-EXPENSES> 5253
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124
<INCOME-PRETAX> 1749
<INCOME-TAX> 743
<INCOME-CONTINUING> 1006
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1006
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
