FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[x] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act Of 1934 For the fiscal year ended
February 28, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [no fee required]
For the transition period from ____________ to ____________.
Commission File Number 1-10655
ENVIRONMENTAL TECTONICS CORPORATION
(Exact name of small business issuer in its charter)
Pennsylvania 23-1714256
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
County Line Industrial Park
Southampton, Pennsylvania 18966
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (215) 355-9100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 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 ___
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B 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-KSB or any amendment to
this Form 10-KSB.[x]
As of May 23, 1997, the aggregate market value of the
Registrant's common stock held by non-affiliates of the
Registrant was approximately $13,027,378.
As of May 23, 1997, there were 2,971,101 shares of Registrant's
common stock, $0.10 par value per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of Registrant's
1997 Annual Report to Stockholders are incorporated by reference
in Part II, Items 5, 6, 7, and 8.
Transitional Small Business Disclosure Format: Yes ___ No x <PAGE>
PART I
Item 1. Description of Business
(a) Business Development
The Company, a Pennsylvania corporation, incorporated in
1969, is principally engaged in the manufacture and sale of
products used in controlling, modifying, simulating and measuring
environmental factors such as temperature, humidity, pressure,
and vacuum. These products include aircrew training systems,
sterilizers, environmental and other products which involve
similar manufacturing techniques and engineering technologies.
Since February 23, 1996, there has been no material change
in the Company's mode of conducting business.
(b) Business of the Company
Principal Products
Aircrew Training Systems. The Company's aircrew training
devices are used for medical research, advanced flight training,
and for the indoctrination and testing of military and commercial
pilots. The major devices sold in this product area are
commercial flight simulators, high altitude decompression
chambers, hyperbaric (high-pressurized oxygen) chambers, night
vision trainers, water survival training equipment,
disorientation training equipment, human centrifuges, and
ejection seat trainers. The Company provides operation and
maintenance services for installed equipment it manufactures as
well as equipment produced by others.
The aircrew training system class of products represented
61% and 52% of consolidated revenues of the Company for the years
ended February 28, 1997 and February 23, 1996, respectively.
Sterilizers. The Company manufactures steam and gas
sterilizers. Steam sterilizers are used for hospital, medical
research laboratory, and industrial purposes. Gas sterilizers
are used for the sterilization of packaged products such as food,
spices, pharmaceutical, and disposable and reusable medical
devices. The Company's sterilizers range in price from
approximately $25,000 to over $1,000,000, and in chamber size
from three cubic feet to over 4,000 cubic feet, although the
Company concentrates on marketing the larger custom-designed
sterilizers to the pharmaceutical and medical device industries.
The sterilizer class of products represented 28% and 31% of
consolidated revenues of the Company for the years ended
February 28, 1997 and February 23, 1996, respectively.
Environmental Systems and Other Products. The Company's
environmental systems business consists of the design and
fabrication of sampling and analysis systems, and test equipment
and systems used in measuring, monitoring and testing air
pollution. The Company also designs and manufactures
environmental simulation systems to meet specific needs of its
customers. The simulation systems generally consist of an
enclosed chamber with instrumentation and equipment which enable
the customer to control and modify such environmental factors as
temperature, pressure, humidity, wind velocity and gas content to
produce desired conditions. These products include controlled
air systems for automotive companies and environmental chambers.
The Company also provides repair and maintenance service for
its own and other manufacturers' equipment.
Sales of these products were 11% and 17% of consolidated
revenues of the Company for the years ended February 28, 1997 and
February 23, 1997, respectively.
Marketing
The Company currently markets its products and services
primarily through its officers and employees. At February 28,
1997, approximately 16 employees were committed to sales and
marketing functions. The Company uses branch offices in the
United Kingdom, the Middle East, and Asia as well as the services
of approximately 100 independent sales organizations in seeking
foreign orders for its products.
Product Development
New products and improvements in existing products are being
continually developed in response to inquiries from customers and
to management's determination that particular products should be
produced or significantly improved. Although the Company does
not have a separate research and development group, significant
efforts are expended in developing new applications of existing
technologies.
The Company is currently focusing its product development
efforts in the aircrew training systems segment, with a
particular emphasis on enhancing the related control systems and
software, and exploring commercial possibilities. The Company
recently completed a Firefighting Command and Control System and
Trainer for a certain foreign governmental agency. The control
system is a real-time interactive training program that provides
instructor-selective, computer-generated image scenarios that
train and test a firefighter's ability to fight various types of
aircraft fires. The trainer simulates fires in aircraft and
structures that must be physically fought and controlled by a
team of firefighters. The Company believes that this development
will provide it with the potential for establishing a new
standardized product for commercial as well as governmental use.
Additionally, the Company believes this area will expand to
training systems for other disaster situations.
The Company incurred research and development costs of
approximately $167,000 and $154,000 for the years ended
February 28, 1997 and February 23, 1996, respectively.
Supplies
The components being used in the assembly of systems and the
parts used to manufacture the Company's products are purchased
from equipment manufacturers, electronics supply firms and
others. To date, the Company has had no difficulty in obtaining
supplies. Further, all raw materials, parts, components, and
other supplies used by the Company in the manufacture of its
products can be obtained at competitive prices from alternate
sources should existing sources of supply become unavailable.
Patents and Trademarks
The Company has no patents or trademarks which it considers
significant to its operations, except a patent on the GYROLAB
Spatial Disorientation Trainer which expires in December 2004.
Customers
In the current year and recent past, it has been the
Company's experience that a substantial portion of sales are made
to a small number of customers that vary within any given year.
The Company's business does not depend upon repeat orders from
these same customers. Sales of aircrew training systems are made
principally to U.S. and foreign governmental agencies. Sales of
sterilizers and environmental systems are made to commercial and
governmental entities worldwide.
In fiscal 1997, the Company's major customers included the
United Kingdom, Japan and the U.S. Government, which accounted
for $3,826,000, $2,527,000 and $2,082,000 of the Company's sales,
respectively. These governmental entities do not have any
relationship with the Company other than as customers.
Foreign and Domestic Operations and Export Sales
During the years ended February 28, 1997 and February 23,
1996, approximately $2,082,000 (10%) and $1,631,000 (10%),
respectively, of the Company's net revenues were attributable to
contracts with agencies of the U.S. Government or with other
customers who had prime contracts with agencies of the federal
government.
During the years ended February 28, 1997 and February 23,
1996, approximately $15,422,000 (70%) and $9,198,000 (59%),
respectively, of the Company's net revenues were attributable to
export sales or sales for export. (See Note 10 to the Company's
consolidated financial statements incorporated herein by
reference to the Annual Report.) On export sales, customers'
obligations to the Company may be secured by irrevocable letters
of credit.
The Company does not believe that the distribution of its
sales for any particular period is necessarily indicative of the
distribution expected for any other period.
A large portion of the Company's sales are under long-term
contracts requiring more than one year to complete. The Company
accounts for sales under long-term contracts on the percentage of
completion basis. See Notes 1 and 3 to consolidated financial
statements.
The Company's U.S. Government contracts contain standard
terms permitting termination for the convenience of the
Government. In the event of termination of such contracts, the
Company is entitled to receive reimbursement on the basis of work
completed (cost incurred plus a reasonable profit), recording the
amounts anticipated to be recovered from termination claims in
income as soon as those amounts can be reasonably determined
rather than at the time of final settlement. All costs
applicable to a termination claim are charged as an offsetting
expense concurrently with the recognition of income from the
claim.
Backlog
The Company's sales backlog at February 28, 1997 and
February 23, 1996 for work to be performed and revenue to be
recognized under written agreements after such dates was
approximately $25,800,000 and $20,900,000, respectively. In
addition, the Company's training and maintenance contracts
backlog at February 28, 1997 and February 23, 1996 for work to be
performed and revenue to be recognized after that date under
written agreements was approximately $5,100,000 and $2,100,000,
respectively. Of the 1997 backlog, approximately $21,900,000 is
under contracts for aircrew training systems and maintenance
support principally for U.S. (approximately $300,000) and foreign
governments (approximately $19,000,000). The U.S. Government
contracts are subject to termination at the convenience of the
Government with equitable cancellation cost recovery.
Approximately 80% of the 1997 backlog is expected to be completed
prior to February 27, 1998.
Competition
The Company's business strategy in recent years has been to
seek niche markets in which there are not numerous competitors.
However, in some areas of its business the Company competes with
well-established firms, some of which have substantially greater
financial and personnel resources.
Some competitor firms have technical expertise and
production capabilities in one or more of the areas involved in
the design and production of physiological flight training
equipment, environmental systems, and other specially designed
products, and compete with the Company for this business. The
competition for any particular project generally is determined by
the technological requirements of the project, with consideration
also being given to a bidder's reliability, product performance,
past performance, and price.
The Company faces particularly intense competition from a
number of firms in the sale of hospital sterilizers but faces
less competition in the sale of the larger custom-designed
industrial sterilizers.
The Company believes that it is a significant participant in
the markets in which it competes, especially in aircrew training
systems in which the Company believes it is a principal provider
of this type of equipment and training in its market area.
Compliance with Environmental Laws
The Company has not incurred during fiscal 1997 nor does it
anticipate incurring during fiscal 1998 any material capital
expenditures to maintain compliance with Federal, state and local
statutes, rules and regulations concerning the discharge of
materials into the environment, nor does the Company anticipate
that compliance with these provisions will have a material
adverse effect on its earnings or competitive position.
Employees
On February 28, 1997, the Company had 189 full-time
employees, of whom 7 were employed in executive positions, 31
were engineers, engineering designers, or draftpeople, 67 were
administrative (sales, accounting, etc.) and clerical personnel,
and 84 were engaged principally in production and operations.
Item 2. Description of Property
The Company owns its executive offices and principal
production facilities located on a 5-acre site in the County Line
Industrial Park, Southampton, Pennsylvania in an approximately
70,000 square foot steel and masonry building. Approximately
55,000 square feet are devoted to manufacturing, and
15,000 square feet to office space. The original building was
erected in 1969 and additions were made in 1973, 1976, 1985 and
1991. This property collateralizes the Company's revolving
credit facility.
The Company considers its machinery and plant to be in
satisfactory operating condition and adequate for the Company's
present level of business. Increases in the level of operations
beyond that expected in the current fiscal year might require the
Company to obtain additional facilities and equipment.
Item 3. Legal Proceedings
In October 1993, the Company was notified by the Royal Thai
Air Force (the "RTAF") that the RTAF was terminating a certain
$4.6 million simulator contract with the Company. Although the
Company had performed in excess of 90% of the contract, the RTAF
alleged a failure to completely perform. In connection with this
termination, the RTAF made a call on a $229,000 performance bond,
as well as a draw on approximately $1.1 million of advance
payment letters of credit. On October 1, 1996, the Thai Trade
Arbitration Counsel rendered a decision in favor of the Company
pursuant to which the contract was reinstated in full and the
Company was given a period of nine months to complete the
remainder of the work. Upon completion of the contract, the RTAF
will pay the Company the open receivables balance, consisting of
the performance bond and the advance payment, plus the 10% due on
the balance of the contract. Based on the progress to date and
recent discussions with the RTAF, the Company estimates it will
probably exceed the nine month contract completion period due to
an extended delay in obtaining an export license for certain
hardware required to complete the project. This license has now
been received and the hardware has been obtained. The Company
has submitted a request for a contract extension under the "force
majeure" clause of the RTAF contract, and the RTAF has agreed to
an extension to complete the installation and training. If the
Company experiences additional delays that are not approved by
the RTAF, the RTAF could invoke penalties against the Company,
including termination of the contract and delay penalties.
A lawsuit was commenced against the Company in April 1997 in
the United States District Court for the District of Puerto Rico
by an employee of a customer who claims to have been injured as a
result of an alleged malfunction of a sterilizer manufactured by
the Company. The plaintiff is seeking $3 million in damages.
Based on the available information, the Company believes that it
possesses meritorious defenses to such action. The Company has
up to $10 million of products liability coverage, subject to a
$100,000 deductible. The Company has notified its insurer of
the lawsuit, and the Company's insurer has engaged counsel to
defend the Company in this matter.
Certain other claims, suits and complaints arising in the
ordinary course of business have been filed or are pending
against the Company. In the opinion of management, all such
matters are reserved for or are adequately covered by insurance
or, if not so covered, are without merit or are of such kind, or
involve such amounts as would not have a significant effect on
the financial position of the Company if disposed of unfavorably.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
See information appearing under the heading "Market for the
Registrant's Common Stock and Related Stockholder Matters" in the
Annual Report, attached hereto as Exhibit 13 and incorporated
herein by reference.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
See information appearing under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report, attached hereto as Exhibit 13
and incorporated herein by reference.
Item 7. Financial Statements
See the information appearing under the headings
"Consolidated Financial Statements" and "Notes to Consolidated
Financial Statements" in the Annual Report, attached hereto as
Exhibit 13 and incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth certain information with
respect to the directors of the Registrant:
Served
as Principal Occupations
Director and Positions and
or Officer Offices with the
Name Age Since(1) Company
- ------------ --- -------- --------------------
William F. Mitchell(2) 55 1969 Chairman of the
Board, President and
Director
Richard E. McAdams(3) 61 1985 Executive Vice
President
and Director
Philip L. Wagner, Ph.D.(4) 60 1993 Director
Pete L. Stephens, M.D.(5) 59 1974 Director
Michael A. Mulshine(6) 57 1994 Director
Duane D. Deaner(7) 49 1996 Chief Financial
Officer
_________________________________________________________________
(1) Directors serve one-year terms.
(2) Mr. Mitchell has been Chairman of the Board, President and
Chief Executive Officer of the Company since 1969, except
for the period from January 24, 1986 through January 24,
1987, when he was engaged principally in soliciting sales
for the Company's products in the overseas markets.
(3) Mr. McAdams has been with the Company since 1970. He became
a Vice President in 1978 with responsibility for contract
administration. Mr. McAdams became Executive Vice President
of the Company in 1990.
(4) Dr. Wagner is an organic chemist with over 30 years of
diversified experience managing research and development and
new business development at E.I. du Pont de Nemours &
Company and thereafter founded Chadds Ford Technologies,
Inc., a consulting firm. He is currently President of
Chadds Ford Technologies, Inc.
(5) Dr. Stephens has been a physician engaged in the private
practice of medicine for 30 years.
(6) Mr. Mulshine has served as a Director of VASCO Corporation,
a public company in the computer data security business,
since 1991. He has been President of Osprey Partners, a
management consulting firm, since 1977. He is Chairman of
the Board of Dynex Sport Optics, Inc., an exclusive licensee
of Wilson Sporting Goods Company, and has been a Director
and Secretary of Scangraphics, Inc., a public company, since
1985. Mr. Mulshine is an instrument-rated pilot who served
as General Manager of a flight simulator company and was
involved in simulation and modeling in his early career. He
received a Bachelor of Science degree in Electrical
Engineering in 1961 from Newark College of Engineering.
(7) Mr. Deaner has served as Chief Financial Officer of the
Company since January 1996. Mr. Deaner served as Vice
President of Finance for Pennfield Precision Incorporated
from September 1988 to December 1995.
Committees of the Board of Directors
During the year ended February 28, 1997, the Company had an
Audit Committee consisting of three independent outside
directors: Messrs. Michael A. Mulshine, Philip L. Wagner and
Dr. Pete L. Stephens. These three independent outside directors
also served on the Company's Compensation Committee during the
year ended February 28, 1997. The Audit Committee is charged
with reviewing and overseeing the Company's financial systems and
internal control procedures and conferring with the Company's
independent accountants with respect thereto. The Compensation
Committee is charged with reviewing the compensation of officers
and key personnel.
During the year ended February 28, 1997, the Board of
Directors held 6 meetings and the Audit Committee and
Compensation Committee each held 1 meeting. All members of the
Board attended all of the meetings of the Board held while they
were members of the Board. All members of the Audit Committee
and Compensation Committee attended all meetings of the Committee
held while they were members thereof.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934
requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's
equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") and
the American Stock Exchange. Officers, directors and greater
than ten percent shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) Forms they
file. The rules of the SEC regarding the filing of such
statement require that "late filings" of such statements be
disclosed in the Company's proxy statement.
Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting
persons that no Forms 5 were required for those persons, the
Company believes that, during the fiscal year ended February 28,
1997, its officers, directors and greater than ten percent
beneficial owners complied with all applicable filing
requirements.
Item 10. Executive Compensation
REMUNERATION OF DIRECTORS AND OFFICERS
The following table sets forth compensation paid by the
Company to the Chief Executive Officer for services rendered
during fiscal years 1997, 1996 and 1995. There are no other
executive officers whose total annual salary and bonus exceeds
$100,000. The footnotes to the table provide additional
information concerning the Company's compensation and benefit
programs.
SUMMARY COMPENSATION TABLE
Annual Compensation
-----------------------------------------
Other
Name and Annual All Other
Principal Fiscal Compen- Compen-
Position Year Salary($) Bonus($) sation($)(1) sation($)(2)
- --------- ------ --------- -------- ------------ ------------
William F. 1997 $113,780 $ - $ - $2,731
Mitchell, 1996 119,531 - - 2,473
President 1995 131,568 - - 1,154
and Chief
Executive
Officer
(1) The Company's executive officers receive certain
perquisites. For fiscal years 1997, 1996 and 1995, the
perquisites received by Mr. Mitchell did not exceed the
lesser of $50,000 or 10% of his salary and bonus.
(2) These amounts represent the Company's contribution to the
Retirement Savings Plan.
Directors of the Company who are not officers of the Company
are paid $600 for Board of Directors meetings which they
attend. Additional compensation is not paid for committee
meetings.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth as of May 23, 1997, the
number of shares and percentage of the Company's Common Stock
owned beneficially by each director, each executive officer named
in the Summary Compensation Table, and each person holding, to
the Company's knowledge, more than 5% of the outstanding Common
Stock. The table also sets forth the holdings of all directors
and executive officers as a group.
Amount and
Nature of Percent
Beneficial of
Name and Address of Beneficial Owner Ownership Class
- ------------------------------------ ---------- -------
William F. Mitchell (1) 943,949 31.8%
c/o Environmental Tectonics
Corporation
County Line Industrial Park
Southampton, PA 18966
Pete L. Stephens, M.D. (2) 317,275(3) 10.7%
1 Eleni Lane
West Chester, PA 19382
Richard E. McAdams (4) 27,526(5) *
c/o Environmental Tectonics
Corporation
County Line Industrial Park
Southampton, PA 18966
Michael A. Mulshine (6) 0 *
Osprey Partners
2517 Route 35
Manasquan, NJ 08736
Philip L. Wagner, Ph.D. (7) 6,000(8) *
Chadds Ford Technologies, Inc.
P.O. Box 377
Chadds Ford, PA 19317
All directors and executive
officers as a group (6 persons) 1,295,875(9) 43.5%
* less than 1%
- --------------------
(1) Chairman of the Board, President and Director of the
Corporation.
(2) Director of the Corporation.
(3) Includes 8,975 shares held by or for the benefit of
Dr. Stephens' wife and two of his children.
(4) Director of the Corporation.
(5) Includes options to purchase 8,000 shares held under the
Company's Incentive Stock Option Plan that are presently
exercisable.
(6) Director of the Corporation.
(7) Director of the Corporation.
(8) Includes 4,000 shares held by or for the benefit of
Dr. Wagner's wife.
(9) Includes options to purchase 9,125 shares held under the
Company's Incentive Stock Option plan that are presently
exercisable.
Item 12. Certain Relationships and Related Transactions
Set forth below is information concerning loans made to the
Company by certain affiliates.
<TABLE>
<CAPTION>
Outstanding
Principal
Original Balance of Annual
Principal Loan as of Percentage
Name of Date of Amount March 27, Interest Maturity
Lender(s) Loan of Loan 1997 Rate Date
<S> <C> <C> <C> <C>
Pete L. Stephens(1) 12/11/96 $100,000.00 $100,000.00 10% 1/1/98
Pete L. Stephens(1) 1/2/97 $ 60,000.00 $ 60,000.00 10% 1/1/98
Pete L. Stephens(1) 1/8/97 $100,000.00 $100,000.00 10% 1/1/98
Pete L. and Anita Stephens(2) 1/8/97 $ 40,000.00 $ 40,000.00 10% 1/1/98
John Mitchell(3) 1/8/97 $400,000.00 $400,000.00 10% 1/1/98
Christine Walters(4) 1/8/97 $ 35,000.00 $ 35,000.00 10% 1/1/98
Christine Walters(4) 1/8/97 $165,000.00 $165,000.00 10% 1/1/98
William F. Mitchell(5) 2/7/97 $300,000.00 $300,000.00 10% 1/1/98
</TABLE>
(1) Director of the Corporation.
(2) Mr. Stephens is a director of the Corporation. Ms. Stephens
is the spouse of Director Stephens.
(3) Mr. John Mitchell is the brother of William F. Mitchell,
Chairman of the Board, President and Director of the
Corporation.
(4) Christine Walters is the daughter of William F. Mitchell,
Chairman of the Board, President and Director of the
Corporation.
(5) Mr. Mitchell is Chairman of the Board, President and
Director of the Corporation.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Item
3.1 Registrant's Articles of
Incorporation, as amended.
3.2 Registrant's By-Laws, as amended,
were filed as Exhibit 3(ii) to
Registrant's Form 10-K for the year
ended February 25, 1994 and is
incorporated herein by reference.
4.1 12% Subordinated Debenture due
March 27, 2004.
10.1 Chief Executive Compensation Plan,
Executive Management/Key Employee
Compensation Plan, General
Compensation Policy was filed as
Exhibit 10(i) to the Registrant's
Form 10-K for the year ended
February 25, 1994 and is
incorporated herein by reference.*
10.2 Registrant's 1988 Incentive Stock
Option Plan was filed as
Exhibit 10(v) to Registrant's
Form 10-K for the year ended
February 23, 1990 and is
incorporated herein by reference.*
10.3 Registrant's Employee Stock
Purchase Plan was filed on July 6,
1988 as Exhibit A to the Prospectus
included in Registrant's
Registration Statement (File
No. 33-42219) on Form S-8 and is
incorporated herein by reference.*
10.4 Registrant's Stock Award Plan
adopted April 7, 1993, filed as
Exhibit 10(ix) to the Registrant's
Form 10-K for the fiscal year ended
February 25, 1994 and is
incorporated herein by reference.*
10.5 Form of 1996 Warrant Agreement between
the Registrant and Chase Manhattan
Capital Corporation, filed as
Exhibit 10(xiv) to the Registrant's
Form 10-KSB for the fiscal year ended
February 23, 1996 and is incorporated
herein by reference.
10.6 Revolving Credit Agreement, dated as
of March 27, 1997, between the
Registrant and First Union National
Bank.
10.7 Debenture Purchase Agreement, dated
March 27, 1997, between the Registrant
and Sirrom Capital Corporation.
10.8 Preferred Stock Purchase Agreement,
dated March 27, 1997, between the
Registrant and Sirrom Capital
Corporation.
10.9 Stock Purchase Warrant, dated March 27,
1997, issued by the Registrant to
Sirrom Capital Corporation.
13 Portions of Registrant's 1997 Annual
Report to Shareholders which are
incorporated by reference into this
Form 10-KSB.
21 List of subsidiaries.
23 Consent of Grant Thornton L.L.P.
27 Financial Data Schedule
- ---------------
* Represents a management contract or
a compensatory plan or arrangement.
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
ENVIRONMENTAL TECTONICS CORPORATION
By/s/ William F. Mitchell
William F. Mitchell, President
and Chief Executive Officer
In accordance with 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.
Name Position Date
---- -------- ----
/s/ William F. Mitchell Chairman of the Board, June 12, 1997
William F. Mitchell President and Director
/s/ Duane D. Deaner Chief Financial June 12, 1997
Duane D. Deaner Officer (Principal
Accounting Officer)
/s/ Richard E. McAdams Director June 12, 1997
Richard E. McAdams
/s/ Michael A. Mulshine Director June 12, 1997
Michael A. Mulshine
/s/ Pete L. Stephens Director June 12, 1997
Pete L. Stephens, M.D.
/s/ Philip L. Wagner Director June 12, 1997
Philip L. Wagner, Ph.D.
<PAGE>
EXHIBIT INDEX
Exhibit No. Item
3.1 Registrant's Articles of
Incorporation, as amended.
3.2 Registrant's By-Laws, as amended,
were filed as Exhibit 3(ii) to
Registrant's Form 10-K for the year
ended February 25, 1994 and is
incorporated herein by reference.
4.1 12% Subordinated Debenture due
March 27, 2004.
10.1 Chief Executive Compensation Plan,
Executive Management/Key Employee
Compensation Plan, General
Compensation Policy was filed as
Exhibit 10(i) to the Registrant's
Form 10-K for the year ended
February 25, 1994 and is
incorporated herein by reference.*
10.2 Registrant's 1988 Incentive Stock
Option Plan was filed as
Exhibit 10(v) to Registrant's
Form 10-K for the year ended
February 23, 1990 and is
incorporated herein by reference.*
10.3 Registrant's Employee Stock
Purchase Plan was filed on July 6,
1988 as Exhibit A to the Prospectus
included in Registrant's
Registration Statement (File
No. 33-42219) on Form S-8 and is
incorporated herein by reference.*
10.4 Registrant's Stock Award Plan
adopted April 7, 1993, filed as
Exhibit 10(ix) to the Registrant's
Form 10-K for the fiscal year ended
February 25, 1994 and is
incorporated herein by reference.*
10.5 Form of 1996 Warrant Agreement between
the Registrant and Chase Manhattan
Capital Corporation, filed as
Exhibit 10(xiv) to the Registrant's
Form 10-KSB for the fiscal year ended
February 23, 1996 and is incorporated
herein by reference.
10.6 Revolving Credit Agreement, dated as
of March 27, 1997, between the
Registrant and First Union National
Bank.
10.7 Debenture Purchase Agreement, dated
March 27, 1997, between the Registrant
and Sirrom Capital Corporation.
10.8 Preferred Stock Purchase Agreement,
dated March 27, 1997, between the
Registrant and Sirrom Capital
Corporation.
10.9 Stock Purchase Warrant, dated March 27,
1997, issued by the Registrant to
Sirrom Capital Corporation.
13 Portions of Registrant's 1997 Annual
Report to Shareholders which are
incorporated by reference into this
Form 10-KSB.
21 List of subsidiaries.
23 Consent of Grant Thornton L.L.P.
27 Financial Data Schedule
- ---------------
* Represents a management contract or
a compensatory plan or arrangement.
EXHIBIT 3.1
Restated
Articles of Incorporation
of
Environmental Tectonics Corporation
* * *
1. The name of the corporation is:
Environmental Tectonics Corporation
2. The location and post office address of its registered
office in the Commonwealth of Pennsylvania is:
C/O Blank, Rome, Klaus & Comisky
Four Penn Center Plaza
Philadelphia, Pennsylvania 19103
3. The purposes for which the corporation is incorporated
are to have unlimited power to engage in and to do any lawful act
concerning any or all lawful business for which corporations may
be incorporated under the Business Corporation Law of the
Commonwealth of Pennsylvania, including without limitation to
manufacture, process, own, use and deal in and with personal
property of every class and description; to engage in research
and development to furnish services; to acquire, own, use and
dispose of real property of any nature whatsoever and to design,
develop, produce, manufacture and dispose of environmental,
electronic and other systems, equipment and products.
4. The corporation is incorporated under the provisions of
the Business Corporation Law of the Commonwealth of Pennsylvania.
5. The term for which the corporation is to exist is
perpetual.
6. The aggregate number of shares which the corporation
shall have authority to issue is 1,500,000 shares of common
stock, par value $.10 per share.
7. The shareholders of the corporation shall not be
entitled to vote cumulatively for the election of directors.
Executed this 24 day of August 1971.
Filed in the Department of State on August 27, 1971.
<PAGE>
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE
CORPORATION BUREAU
Statement of Change of Registered Office --
Domestic Business Corporation
In compliance with the requirements of section 307 of the
Business Corporation Law, act of May 5, 1933 (P.L. 364) (15 P.S.
Section 1307) the undersigned corporation, desiring to effect a change
in registered office, does hereby certify that:
1. The name of the corporation is:
ENVIRONMENTAL TECTONICS CORPORATION
2. The address of its present registered office in this
Commonwealth is (the Department of State is hereby authorized to
correct the following statement to conform to the records of the
Department):
c/o Blank, Rome, Klaus & Comisky
Four Penn Center Plaza
Philadelphia, Pennsylvania 19103
3. The address to which the registered office in this
Commonwealth is to be changed is:
James Way
County Line Industrial Park
Southampton, Pennsylvania 18966
4. Such change was authorized by resolution duly adopted
by at least a majority of the members of the board of directors
of the corporation.
IN TESTIMONY WHEREOF, the undersigned corporation has caused
this statement to be signed by a duly authorized officer, and its
corporate seal, duly attested by another such officer, to be
hereunto affixed, this 24th day of July, 1984.
<PAGE>
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE
CORPORATION BUREAU
Articles of Amendment --
Domestic Business Corporation
In compliance with the requirements of section 806 of the
Business Corporation Law, act of May 5, 1933 (P.L. 364) (15 P.S.
Section 1806) the undersigned corporation, desiring to amend its
Articles, does hereby certify that:
1. The name of the corporation is:
ENVIRONMENTAL TECTONICS CORPORATION
2. The location of its registered office in this
Commonwealth is (the Department of State is hereby authorized to
correct the following statement to conform to the records of the
Department):
James Way
County Line Industrial Park
Southampton, Pennsylvania 18966
3. The statute by or under which it was incorporated is:
The Act of May 5, 1933, P.L. 364.
4. The date of its incorporation is: August 11, 1969.
5. (Check, and if appropriate, complete one of the
following):
[X] The meeting of the shareholders of the corporation
at which the amendment was adopted was held at the
time and place and pursuant to the kind and period
of notice herein stated.
Time: The 18th day of April, 1985.
Place: Company Offices, James Way, County Line
Industrial Park, Southampton, PA
Kind and period of notice: 29 days written notice
[ ] The amendment was adopted by a consent in writing,
setting forth the action so taken, signed by all
of the shareholders entitled to vote thereon and
filed with the Secretary of the corporation.
6. At the time of the action of shareholders:
(a) The total number of shares outstanding was:
1,363,869 shares of Common Stock.
(b) The number of shares entitled to vote was:
909,307 shares of Common Stock, being all of the
shares outstanding on the record date, March 11,
1985.
7. In the action taken by the shareholders.
(a) The number of shares voted in favor of the
amendment was:
774,034 shares
(b) The number of shares voted against the amendment
was:
7,992 shares
8. The amendment adopted by the shareholders, set forth in
full, is as follows:
"RESOLVED, that Paragraph 6 of the Articles of
Incorporation of Environmental Tectonics Corporation be and
hereby is amended to read as follows:
'6. The aggregate number of shares
which the corporation shall have authority to
issue is 10,000,000 shares of common stock,
par value $.10 per share.'"
IN TESTIMONY WHEREOF, the undersigned corporation has caused
these Articles of Amendment to be signed by a duly authorized
officer, and its corporate seal, duly attested by another such
officer, to be hereunto affixed, this 24th day of April, 1985.
<PAGE>
STATEMENT WITH RESPECT TO SHARES-DOMESTIC BUSINESS CORPORATION
In connection with the requirements of 15 Pa.C.S.
Section 1522(b) (relating to statement with respect to shares),
the undersigned corporation, desiring to state the designation
and voting rights, preferences, limitations, and special rights,
if any, of a class or series of its shares, hereby states that:
1. The name of the corporation is: Environmental Tectonics
Corporation.
2. (Check and complete one of the following):
___ The resolution amending the Articles under 15 Pa.C.S.
Section 1522(b) (relating to divisions and
determinations by the board), set forth in full, is as
follows:
X The resolution amending the Articles under 15 Pa.C.S.
Section 1522(b) is set forth in full in Exhibit A
attached hereto and made a part hereof.
3. The aggregate number of shares of such class or series
established and designated by (a) such resolution, (b) all
prior statements, if any, filed under 15 Pa.C.S.
Section 1522 or corresponding provisions of prior law with
respect thereto, and (c) any other provision of the Articles
is 25,000 shares.
4. The resolution was adopted by the Board of Directors or an
authorized committee thereof on: March 26, 1997.
5. (Check, and if appropriate complete, one of the following):
X The resolution shall be effective upon the filing this
statement with respect to shares in the Department of
State.
___ The resolution shall be effective on: ________________
(Date) at _____________________________ (Hour)
IN TESTIMONY WHEREOF, the undersigned corporation has caused
this statement to be signed by a duly authorized officer thereof
this 27th day of March, 1997.
<PAGE>
EXHIBIT A
STATEMENT WITH RESPECT TO SHARES
OF
ENVIRONMENTAL TECTONICS CORPORATION
RESOLVED, that pursuant to the powers expressly delegated to
the Board of Directors by Article 4 of the Articles of
Incorporation of the Company, the Company hereby establishes and
designates one series of preferred stock and fixes and determines
as set forth herein the relative rights and preferences thereof
as follows:
Designation. There shall be established a series of
preferred stock, which shall consist of 25,000 shares of the
authorized preferred stock and shall be designated Series A
Convertible Preferred Stock (herein referred to as the "Preferred
Stock").
Dividends.
(a) The holders of Preferred Stock shall be entitled
to receive dividends (the "Preferred Dividend") at the rate of
$11.00 per share per annum (as adjusted for any stock dividends,
combinations, or splits with respect to such shares) on a
cumulative basis from the actual date of original issue of each
share of Preferred Stock (the "Original Issue Date"), whether or
not declared, payable out of funds legally available therefor, on
the first day of each February, May, August, and November in each
year (each a "Dividend Payment Date"). Payments shall commence
on the first such date to occur after the Original Issue Date, to
the holders of record of the Preferred Stock on the fifteenth day
of the month preceding each Dividend Payment Date, in the amount
of $2.75 per share on each Dividend Payment Date, and payable in
the event of a liquidation, dissolution or winding up of the
Company (whether voluntary or involuntary) or upon conversion of
the Preferred Stock as provided in Section 5 and Section 7(a)
hereof.
(b) No dividends (other than those payable solely in
the Common Stock of the Company) shall be paid on any Common
Stock of the Company during any fiscal year of the Company until
dividends in the amount of $11.00 per share of the Preferred
Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares) shall have been paid, or
declared and set apart during that fiscal year and for any prior
year in which dividends have accumulated but remain unpaid.
(c) In the event that either (i) the Company fails to
pay the Preferred Dividend on six (6) consecutive Dividend
Payment Dates, or (ii) the aggregate amount of all accumulated
but unpaid dividends shall equal or exceed the amount of $16.50
per share of Preferred Stock, then the holders of the Preferred
Stock shall have the right immediately to elect that number of
members to the Board of Directors as shall constitute a majority
of the Board of Directors. This right to elect a majority of the
members of the Board of Directors shall continue until all
accumulated but unpaid Preferred Dividends shall have been paid
in full.
Liquidation, Dissolution, or Winding Up.
(a) In the event of any liquidation, dissolution, or
winding up of the Company, whether voluntary or involuntary, the
holders of the Preferred Stock shall be entitled to be paid first
out of the assets of the Company available for distribution to
holders of the Company's capital stock of all classes and before
any sums shall be paid or any assets distributed among the
holders of shares of any other class or series of capital stock
of the Company, including Common Stock, an amount per share equal
to One Hundred Dollars ($100.00) plus the cumulative dividend as
set forth in Section 2(a) hereof whether or not declared, plus an
amount equal to all other accrued but unpaid Preferred Dividends
(the "Preference Amount"). The Preference Amount shall be
tendered to the holders of the Preferred Stock before any sums
shall be paid or any assets distributed to the holders of the
shares of any other class or series of capital stock, including
without limitation Common Stock. If the assets of the Company
shall be insufficient to permit the payment in full to the
holders of the Preferred Stock of the amounts thus distributable,
then the entire assets of the Company available for such
distribution shall be distributed ratably among the holders of
the Preferred Stock in proportion to the preferential amount each
such holder is otherwise entitled to receive. After such payment
shall have been made in full to the holders of the Preferred
Stock or funds necessary for such payment shall have been set
aside by the Company in trust for the account of holders of the
Preferred Stock so as to be available for such payment, holders
of the Preferred Stock shall not be entitled to participate in
the distribution of any remaining assets of the Company.
(b) Any consolidation, merger or a statutory share
exchange (other than a merger with a wholly-owned subsidiary of
the Company or a consolidation, merger, share exchange or other
business combination in which the outstanding voting stock of the
Company immediately prior to such consolidation, merger, share
exchange or business combination constitutes a majority of the
voting stock of the surviving entity) in which the outstanding
shares of capital stock of the Company are exchanged for
securities or other consideration of or from another corporation,
or a sale of all or substantially all the assets or stock of the
Company, shall be deemed to be a liquidation, dissolution, or
winding up of the affairs of the Company within the meaning of
this Section 3, and shall entitle the holders of the Preferred
Stock to receive on the effective date of such event the
Preference Amount, in cash, securities or other property;
provided, however, that any such event shall not be so regarded
as a liquidation, dissolution, or winding up of the affairs of
the Company with respect to the Preferred Stock if the holders of
two-thirds (2/3) of the outstanding shares of the Preferred Stock
elect not to have any such event deemed to be a liquidation,
dissolution, or winding up of the affairs of the Company by
giving written notice thereof to the Company at least ten (10)
days prior to the effective date of such event.
(c) Whenever the distribution provided for in this
Section 3 shall be paid in property other than cash, the value of
such distribution shall be the fair value thereof determined in
good faith by the Board of Directors of the Company.
J\0 In the event that outstanding shares of Preferred
Stock shall be subdivided into a greater number of shares of
Preferred Stock, the Preference Amount in effect immediately
prior to each such subdivision, simultaneously with the
effectiveness of such subdivision, shall be proportionately
reduced, and, conversely, in case outstanding shares of Preferred
Stock shall be combined into a smaller number of shares of
Preferred Stock, the Preference Amount in effect immediately
prior to each such combination, simultaneously with the
effectiveness of such combination, shall be proportionately
increased.
Voting Rights; Directors.
(a) Except as otherwise required by law, or as
specifically provided herein, the holders of shares of Preferred
Stock and Common Stock shall vote together as a single class on
all matters submitted to a vote of the stockholders of the
Company, with each holder of Preferred Stock entitled to that
number of votes equal to the number of shares of Common Stock
which would be issuable upon conversion of such shares of
Preferred Stock, as provided in Section 5(a) hereof (the "As
Converted Number of Shares") of such holder (with fractional
shares rounded up or down to the nearest whole number) at the
record date for the determination of stockholders entitled to
vote on such matters or, if no such record date is established,
at the date such vote is taken or any written consent of
stockholders is solicited. The holders of the Preferred Stock
shall be entitled to notice of any stockholders' meeting in
accordance with the Bylaws of the Company.
(b) For so long as at least thirty-three and one-third
percent (33 1/3%) of the number of shares of Preferred Stock
issued on the Original Issue Date remain outstanding, the holders
of the Preferred Stock, voting separately as a class, shall be
entitled to elect one (1) member of the Board of Directors. The
holders of the Preferred Stock shall vote together with holders
of the Common Stock as a single class as provided in Section 4(a)
above for the election of all other members of the Board of
Directors provided that the Board of Directors shall not consist
of more than six (6) members.
Conversion Rights. The holders of the Preferred Stock
shall have the following conversion rights:
(a) Right to Convert. Each share of Preferred Stock
shall be convertible at any time, at the option of the holder
thereof, into such number of fully paid and nonassessable shares
of Common Stock as is determined by dividing One Hundred Dollars
($100.00) (the "Numerator") by the Conversion Price (as defined
below) in effect at the time of conversion, provided that all
shares held by such holder are so converted. The conversion
price at which shares of Common Stock shall be deliverable upon
conversion of Preferred Stock without the payment of additional
consideration by the holder thereof (the "Conversion Price")
initially shall be six dollars ($6.00). Such initial Conversion
Price, and the rate at which shares of Preferred Stock may be
converted into shares of Common Stock, shall be subject to
adjustment as provided below. In the event of a liquidation of
the Company, the conversion rights shall terminate at the close
of business on the first full day preceding the date fixed for
the payment of any amounts distributable on liquidation to the
holders of Preferred Stock.
(b) Adjustment to Conversion Price Upon Occurrence of
Extraordinary Common Stock Event. Upon the happening of an
Extraordinary Common Stock Event (as hereinafter defined), the
Conversion Price for the Preferred Stock, simultaneously with the
happening of such Extraordinary Common Stock Event, shall be
adjusted by multiplying the then-effective Conversion Price by a
fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such Extraordinary
Common Stock Event and the denominator of which shall be the
number of shares of Common Stock outstanding immediately after
such Extraordinary Common Stock Event, and the product so
obtained thereafter shall be the Conversion Price for the
respective series of Preferred Stock. The Conversion Price, as
so adjusted, shall be readjusted in the same manner upon the
happening of any successive Extraordinary Common Stock Event(s).
"Extraordinary Common Stock Event" shall mean (i) the issuance of
additional shares of Common Stock as a dividend or other
distribution on outstanding Common Stock, (ii) a stock split or
subdivision of outstanding shares of Common Stock into a greater
number of shares of Common Stock, or (iii) a reverse stock split
or combination of outstanding shares of Common Stock into a
smaller number of shares of Common Stock.
(c) Recapitalization or Reclassification. If the
Common Stock issuable upon the conversion of the Preferred Stock
shall be changed into the same or a different number of shares of
any class or classes of stock of the Company, whether by
recapitalization, reclassification, or otherwise (other than a
subdivision or combination of shares or stock dividend provided
for in Section 5(b) hereof, or a reorganization, merger, share
exchange, consolidation, or sale of assets provided for in
Section 5(d) hereof), then and in each such event the holder of
each share of Preferred Stock shall have the right thereafter to
convert such share into the kind and amount of shares of stock
and other securities and property receivable upon such
recapitalization, reclassification, or other change by holders of
the number of shares of Common Stock into which such share of
Preferred Stock might have been converted immediately prior to
such recapitalization, reclassification, or change, all subject
to further adjustment as provided herein.
(d) Capital Reorganization, Merger, Share Exchange,
Consolidation, or Sale of Assets. If at any time or from time to
time there shall be a capital reorganization of the Common Stock,
including a merger, share exchange, consolidation, or sale of all
or substantially all of assets of the Company (other than a
subdivision or combination of shares or stock dividend provided
for in Section 5(b) hereof or a recapitalization or
reclassification provided for in Section 5(c) hereof), then, as a
part of such reorganization, provision shall be made so that the
holders of the Preferred Stock thereafter shall be entitled to
receive, upon conversion of each share of the Preferred Stock,
the number of shares of stock or other securities or property to
which a holder of the number of shares of Common Stock into which
such shares of Preferred Stock might have been converted
immediately prior to such capital reorganization would have been
entitled to receive. In any such case, appropriate adjustment
shall be made in the application of the provisions of this
Section 5 with respect to the rights of the holders of the
Preferred Stock after the reorganization to the end that the
provisions of this Section 5 (including adjustment of the
Conversion Price then in effect and the number of shares acquired
upon conversion of the Preferred Stock) shall be applicable after
that event in as nearly equivalent a manner as may be
practicable. In the case of a consolidation, merger, share
exchange, or sale of all or substantially all the assets of the
Company, the provisions of Section 3(b) shall apply, and this
Section 5(d) shall not apply, unless the holders of two-thirds
(2/3) of outstanding shares of a series of Preferred Stock elect
that such event shall not be deemed to be a liquidation,
dissolution, or winding up of the affairs of the Company (such
election to be exercised by the holders of two-thirds (2/3) of
the outstanding shares of a series of Preferred Stock by
providing written notice to the Company of such election at least
ten (10) days prior to the date of such consolidation, merger,
share exchange, or sale of all or substantially all the assets of
the Company).
(e) Certificate as to Adjustments. In each case of an
adjustment or readjustment of the Conversion Price of the
Preferred Stock, the Company will furnish each holder of the
Preferred Stock with a certificate prepared by the Chief
Financial Officer of the Company showing such adjustment or
readjustment and stating in detail the facts upon which such
adjustment or readjustment is based.
(f) Exercise of Conversion Privilege. To exercise its
conversion privilege, a holder of Preferred Stock shall surrender
the certificate(s) representing the shares being converted to the
Company at its principal office, accompanied by written notice to
the Company at that office that such stockholder elects to
convert such shares (a "Conversion Notice"). The Conversion
Notice also shall state the name(s) and address(es) in which the
certificate(s) for shares of Common Stock issuable upon such
conversion shall be issued. The certificate(s) for shares of
Preferred Stock surrendered for conversion shall be accompanied
by proper assignment thereof to the Company or in blank. The
date when the Conversion Notice is received by the Company
together with the certificate(s) representing the shares of
Preferred Stock being converted shall be the "Conversion Date."
As promptly as practicable after the Conversion Date, the Company
shall issue and deliver to the holder of the shares of Preferred
Stock being converted, or on its written order, such
certificate(s) as it may request of the number of whole shares of
Common Stock issuable upon the conversion of such shares of
Preferred Stock in accordance with the provisions of this
Section 5 and cash, as provided in Section 5(g), in respect of
any fraction of a share of Common Stock issuable upon such
conversion. Such conversion shall be deemed to have been
effected immediately prior to the close of business on the
Conversion Date, and at such time the rights of the holder as a
holder of the converted shares of Preferred Stock shall cease and
the person(s) in whose name(s) any certificate(s) for shares of
Common Stock shall be issuable upon such conversion shall be
deemed to have become the holder(s) of record of the shares of
Common Stock represented thereby.
(g) Cash in Lieu of Fractional Shares. No fractional
shares of Common Stock or scrip representing fractional shares
shall be issued upon the conversion of shares of Preferred Stock.
Instead of any fractional shares of Common Stock that otherwise
would be issuable upon conversion of a series of Preferred Stock,
the Company shall pay to the holder of the shares of Preferred
Stock that were converted a cash adjustment in respect of such
fractional shares in an amount equal to the same fraction of the
Fair Market Value price per share of the Common Stock at the
close of business on the Conversion Date. "Fair Market Value"
shall mean (i) in the case of a security listed or admitted to
trading on any securities exchange, the last reported sale price,
regular way (as determined in accordance with the practices of
such exchange), on such day, or if no sale takes place on such
day, the average of the closing bid and asked prices on such day
(and in the case of a security traded on more than one national
securities exchange, at such price or such average, upon the
exchange on which the volume of trading during the last calendar
year was the greatest), (ii) in the case of a security not then
listed or admitted to trading on any securities exchange, the
last reported sale price on such day, or if no sale takes place
on such day, the average of the closing bid and asked prices on
such day, as reported by a reputable quotation service designated
by the Company, (iii) in the case of a security not then listed
or admitted to trading on any securities exchange and as to which
no such reported sale price or bid and asked prices are
available, the average of the reported high bid and low asked
prices on such day, as reported by a reputable quotation service,
or the Wall Street Journal, or if there are no bids and asked
prices on such day, the average of the high bid and low asked
prices, as so reported, on the most recent day (not more than
30 days prior to the date in question) for which prices have been
so reported, and (iv) in the case of a security determined by the
Company's Board of Directors as not having an active quoted
market or in the case of other property, such fair market value
as shall be determined by the Board of Directors. The
determination as to whether any fractional shares are issuable
shall be based upon the total number of shares of Preferred Stock
being converted at any one time by any holder thereof, not upon
each share of Preferred Stock being converted.
(h) Reservation of Common Stock. The Company at all
times shall reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Preferred Stock,
such number of its shares of Common Stock as from time to time
shall be sufficient to effect the conversion of all outstanding
shares of the Preferred Stock, and if at any time the number of
authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding
shares of the Preferred Stock, the Company shall take such
corporate action as may be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose.
(i) Special Adjustment of Conversion Price. In the
event that the Company enters into a written agreement with the
United Kingdom Ministry of Defense prior to July 31, 1997,
providing for payments to the Company of $19,000,000, then the
Conversion Price shall automatically, be adjusted to $7.50,
subject to further adjustment as set forth in Section 5.
Restrictions and Limitations.
(a) Voting as a Class. So long as any shares of
Preferred Stock remain outstanding, the Company will not take any
of the following actions without the affirmative vote or consent
(with each share of Preferred Stock being entitled to one vote)
of the holders of at least a majority of the outstanding shares
of the Preferred Stock, given in writing or by resolution adopted
at a meeting called for such purpose:
(i) redeem, purchase or otherwise acquire for
value (or pay into or set aside for a sinking fund for such
purpose) any share or shares of Preferred Stock otherwise
than by redemption of Preferred Stock in accordance with
Section 7 hereof or by conversion in accordance with
Section 5 hereof;
(ii) redeem, purchase or otherwise acquire (or
pay into or set aside for a sinking fund for such purpose)
any of the Common Stock, except for (A) the purchase of
rights to exercisable options under the Company's 1988
Incentive Stock Option Plan in an amount not to exceed the
difference between the exercise price of such option and the
Fair Market Value of the Common Stock on the date of
purchase by the Company, or (B) the purchase of the warrant
for 100,000 shares of Common Stock held by Chase Manhattan
Capital Corporation, for an amount not to exceed $375,000;
(iii) authorize or issue, or obligate itself to
issue, any other equity security senior to or on a parity
with the Preferred Stock as to dividend rights or redemption
rights or liquidation preferences;
(iv) consolidate or merge with (other than a
merger with a wholly-owned subsidiary of the Company or a
consolidation, merger, share exchange or other business
combination in which the outstanding voting stock of the
Company immediately prior to such consolidation, merger,
share exchange or business combination constitutes a
majority of the voting stock of the surviving entity) or
into, or sell or license all or substantially all the assets
of the Company to, any other person or entity, liquidate,
dissolve, or wind-up the affairs of the Company,
recapitalize the outstanding capital stock of the Company,
or reorganize the affairs of the Company;
(v) increase or decrease (other than by
redemption or conversion) the total number of authorized
shares of Preferred Stock; or
(vi) effect an exchange, reclassification or
cancellation of all or part of the shares of Preferred Stock
or Common Stock, or effect an exchange, or create a right of
exchange, of all or part of the shares of another class or
series into the shares of Preferred Stock or Common Stock,
whether in securities of the Company or another corporation.
(b) Voting by Series of Preferred Stock. The Company
shall not amend its Articles of Incorporation or Bylaws without
the approval of the holders of a majority of the outstanding
shares of Preferred Stock if such amendment would:
(i) reduce the dividend rates on the Preferred
Stock provided for herein, make such dividends
noncumulative, defer the date from which dividends will
accrue, cancel accrued and unpaid dividends, or change the
relative seniority rights of the holders of the Preferred
Stock as to the payment of dividends in relation to the
holders of any other capital stock of the Company;
(ii) reduce the amount payable to the holders of
the Preferred Stock upon the voluntary or involuntary
liquidation, dissolution or winding up of the Company, or
change the relative seniority of the liquidation preferences
of the holders of the Preferred Stock;
(iii) reduce the Redemption Price specified in
Section 7 hereof with respect to such series;
(iv) delay any of the Redemption Dates provided
for in Section 7 hereof;
(v) cancel or modify the conversion rights of the
Preferred Stock provided for in Section 5 hereof; or
(vi) otherwise amend its Articles of
Incorporation if such amendment would change adversely any
of the rights, preferences or privileges provided for
herein for the benefit of any shares of Preferred Stock.
Redemption.
(a) Preferred Stock Right of Redemption; Automatic
Conversion. The Company shall redeem, from any source of funds
legally available therefor, the Preferred Stock of each holder
thereof in three (3) annual installments beginning on the fifth
(5th) anniversary of the Original Issue Date (each a "Redemption
Date"), unless such holder has elected to waive its right of
redemption as provided herein. The Company shall effect this
redemption by paying in cash to each such holder for each share
of Preferred Stock a sum equal to One Hundred Dollars ($100.00)
per share (as adjusted for any stock dividends, combinations, or
splits with respect to such shares), plus an amount equal to all
accumulated but unpaid dividends for the shares to be redeemed
(the "Redemption Price"). A holder of Preferred Stock may elect,
by written notice delivered to the Company not less than
twenty-one (21) days prior to the Redemption Date, to waive its
right to have redeemed all (but not less than all) of the shares
of Preferred Stock held by such holder which are eligible to be
redeemed on such Redemption Date, provided that on such
Redemption Date each such share of Preferred Stock which is not
redeemed shall be converted automatically into shares of Common
Stock at the Conversion Price then in effect on such Redemption
Date. The number of shares of Preferred Stock that the Company
shall be required under this Section 7(a) to redeem on each
Redemption Date shall be 8,333 shares, except that the Company
shall be required to redeem all the shares of Preferred Stock
outstanding on the seventh (7th) anniversary of the Original
Issue Date. Any redemption shall be made on a pro rata basis
among the holders of the Preferred Stock in proportion to the
shares of such series of Preferred Stock then held by them.
(b) Redemption at the Option of the Company. The
Preferred Stock may not be repurchased by the Company at the
option of the Company at any time prior to the second anniversary
of the Original Issue date. Notwithstanding anything herein to
the contrary, on and after the second anniversary of the Original
Issue Date, the Preferred Stock shall be subject to redemption,
at the option of the Company, in whole or in part, at any time
or from time to time (a "Called Redemption Date"), provided that
the average bid price for the Common Stock has been greater than
$9.50 per share during the twenty (20) business days prior to the
date of the Redemption Notice (as defined below). The procedure
for the redemption or repurchase of the Preferred Stock by the
Company pursuant to the provisions of this Section 7(b) shall be
as set forth in Section 7(c) below.
(c) Procedures for Redemption of Preferred Stock. At
least thirty (30) days but not more than forty-five (45) days
prior to each Redemption Date the Company shall mail a written
notice, first class postage prepaid, to each holder of record at
the close of business on the business day preceding the day on
which notice is given, of the Preferred Stock to be redeemed, at
the address last shown on the records of the Company for such
holder, notifying such holder of the redemption to be effected,
specifying (i) the number of shares to be redeemed from such
holder, (ii) the Redemption Date, (iii) the Redemption Price,
(iv) the place at which payment may be obtained, (v) advising
such holder of its right to elect to waive its right to have all
(but not less than all) such shares redeemed and that, if such
election is made, such shares of Preferred Stock which are not
redeemed shall be converted automatically into shares of Common
Stock at the Conversion Price then in effect (setting forth such
Conversion Price), and (vi) calling upon such holder to surrender
to the Company, in the manner and at the place designated, its
certificate or certificates representing the shares to be
redeemed (the "Redemption Notice"). On or after the Redemption
Date, each holder of Preferred Stock to be redeemed shall
surrender to the Company the certificate or certificates
representing such shares, in the manner and at the place
designated in the Redemption Notice, and thereupon the Redemption
Price of such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the
owner thereof and each surrendered certificate shall be canceled.
In the event less than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares. From and after each
Redemption Date, unless there shall have been a default in
payment of the Redemption Price, any shares of Preferred Stock
redeemed on such Redemption Date shall not be entitled to any
further rights as Preferred Stock and shall not be deemed
outstanding for any purpose. If the funds of the Company legally
available for redemption of shares of Preferred Stock on any
Redemption Date are insufficient to redeem the total number of
shares of Preferred Stock to be redeemed on such date, those
funds which are legally available will be used to redeem the
maximum possible number of such shares ratably among the holders
of such shares to be redeemed based upon the number of shares of
Preferred Stock held by each such holder. The shares of
Preferred Stock not redeemed shall remain outstanding and
entitled to all the rights and preferences provided herein. At
any time thereafter when additional funds of the Company are
legally available for the redemption of shares of Preferred Stock
such funds will be used immediately to redeem the balance of the
shares which the Company has become obliged to redeem on any
Redemption Date, but which it has not redeemed, it being
understood that any such redemption shall not constitute a waiver
by a holder of Preferred Stock of any rights derived from the
failure to redeem on the Redemption Date.
No Reissuance of Convertible Preferred Stock. No share(s)
of Preferred Stock acquired by the Company by reason of
redemption, purchase, conversion, or otherwise shall be reissued,
and all such shares shall be canceled, retired, and eliminated
from the shares that the Company shall be authorized to issue.
The Company from time to time may take such appropriate corporate
action as may be necessary to reduce the authorized number of
shares of the Preferred Stock accordingly.
No Dilution or Impairment. The Company will not, by
amendment of its Articles of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, share
exchange, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of the Preferred Stock set forth
herein, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the
rights of the holders of the Preferred Stock against dilution or
other impairment.
Notices of Record Date. In the event of any:
(a) taking by the Company of a record of the holders
of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend or other
distribution, or any right to subscribe for, purchase, or
otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right; or
(b) capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company, any merger, consolidation, or share exchange of the
Company, or any transfer of all or substantially all the assets
of the Company to any other corporation, or any other entity or
person; or
(c) voluntary or involuntary dissolution, liquidation,
or winding up the Company;
then and in each such event the Company shall mail or cause to be
mailed to each holder of Preferred Stock a notice specifying
(i) the record date for such dividend, distribution, or right and
a description of such dividend, distribution, or right, (ii) the
date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, share
exchange, dissolution, liquidation, or winding up is expected to
become effective, and (iii) the time, if any, that is to be fixed
as to when the holders of record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common
Stock (or other securities) for securities or other property
deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, share
exchange, dissolution, liquidation, or winding up. Such notice
shall be mailed at least ten (10) days prior to the date
specified in such notice on which such action is to be taken.
Exhibit 4.1
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY APPLICABLE
STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED UNLESS (i) THERE
IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR SUCH APPLICABLE STATE SECURITIES LAWS, OR (ii) IN THE OPINION
OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY REGISTRATION
UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS
IS NOT REQUIRED IN CONNECTION WITH SUCH TRANSFER.
THE INDEBTEDNESS EVIDENCED BY THIS DEBENTURE IS SUBORDINATED TO
THE PRIOR PAYMENT IN FULL OF THE BANK DEBT (AS DEFINED IN THE
SUBORDINATION AGREEMENT REFERRED TO BELOW) PURSUANT TO, AND TO
THE EXTENT PROVIDED IN, THAT CERTAIN SUBORDINATION AGREEMENT
DATED MARCH 27, 1997, AMONG ENVIRONMENTAL TECTONICS CORPORATION,
SIRROM CAPITAL CORPORATION, AND FIRST UNION NATIONAL BANK.
Environmental Tectonics Corporation
12% Subordinated Debenture Due March 27, 2004
No. R-1 March 27, 1997
$4,000,000.00
For value received, Environmental Tectonics
Corporation, a Pennsylvania corporation (the "Company"), hereby
promises to pay to Sirrom Capital Corporation at Tandem Capital,
Inc., 500 Church Street, Suite 200, Nashville, Tennessee 37219,
or registered assigns, on the 27th day of March, 2004, the
principal amount of $4,000,000.00 and to pay interest (computed
on the basis of a 360-day year of twelve 30-day months) on the
principal amount from time to time remaining unpaid hereon at the
rate of 12% per annum from the date hereof until maturity,
payable quarterly on the first day of each February, May, August,
and November in each year commencing May 1, 1997, and at
maturity. The Company agrees to pay interest (computed on the
same basis) on overdue principal and premium, if any, and (to the
extent legally enforceable) on any overdue installment of
interest, at the rate of 13% per annum (or, in each case, at the
highest rate permitted by applicable law, whichever is less)
until paid.
Both the principal hereof and interest hereon are
payable to the order of the holder hereof at its address
registered on the books of the Company or by federal funds wire
transfer to a bank account designated in writing by the holder to
the Company in coin or currency of the United States of America
which at the time of payment shall be legal tender for the
payment of public and private debts. If any amount of principal,
premium, if any, or interest on or in respect of this Debenture
becomes due and payable on any date which is not a Business Day,
such amount shall be payable on the next preceding Business Day.
"Business Day" means any day other than a Saturday, Sunday,
statutory holiday or other day on which banks in Tennessee are
required by law to close or are customarily closed.
This Debenture is one of the 12% Subordinated
Debentures due March 27, 2004 of the Company in the aggregate
principal amount of $4,000,000.00 issued under and pursuant to
the terms and provisions of the Debenture Purchase Agreement,
dated as of March 27, 1997 (the "Debenture Agreement"), entered
into by the Company with the original purchaser referred to
therein, and this Debenture and the holder hereof are entitled,
equally and ratably with the holders of all other Debentures
outstanding under the Debenture Agreement, to all the benefits
and security provided for thereby or referred to therein, and to
which Debenture Agreement reference is hereby made for all such
terms and provisions.
This Debenture is subordinated to certain other
indebtedness of the Company to the extent and with the effect set
forth in the Subordination Agreement between the Company, First
Union National Bank, and Sirrom Capital Corporation dated as of
March 27, 1997.
If an Event of Default, as defined in the Debenture
Agreement, occurs and is continuing, the principal of this
Debenture and the other Debentures outstanding under the
Debenture Agreement may be declared due and payable in the manner
and with the effect provided in the Debenture Agreement.
This Debenture is registered on the books of the
Company and is transferable only by surrender thereof at the
principal office of the Company at 125 James Way, Southampton,
Pennsylvania 18966-3877, or such other address as the Company
shall have advised the holders of the Debenture in writing, duly
endorsed or accompanied by a written instrument of transfer duly
executed by the registered holder of this Debenture or its
attorney duly authorized in writing. Payment of or on account of
principal, premium, if any, and interest on this Debenture shall
be made only to or upon the order in writing of the registered
holder.
If the indebtedness represented by this Debenture or
any part thereof is placed in the hands of attorneys for
collection after an Event of Default, or the enforcement of any
rights under the Debenture Agreement, the Company agrees to pay
the principal, premium if any, and interest due and payable
hereon, and an amount equal to all costs of collecting this
Debenture, including reasonable attorneys' fees and expenses.
This Debenture and the Debenture Agreement are governed
by and construed in accordance with the laws of the State of
Tennessee.
[Corporate Seal] ENVIRONMENTAL TECTONICS CORPORATION
By/s/ Duane Deaner
Duane Deaner, Chief
Financial Officer
ATTEST:/s/ Richard E. McAdams
Secretary
Exhibit 10.6
REVOLVING CREDIT AGREEMENT
between
FIRST UNION NATIONAL BANK
and
ENVIRONMENTAL TECTONICS CORPORATION
Dated as of March 27, 1997
<PAGE>
REVOLVING CREDIT AGREEMENT BETWEEN FIRST UNION NATIONAL BANK
and ENVIRONMENTAL TECTONICS CORPORATION
TABLE OF CONTENTS
Article Page
ARTICLE I - DEFINITIONS...................................... 1
ARTICLE II - CREDIT ACCOMMODATIONS........................... 9
2.1 The Line of Credit...................................... 9
2.2 Interest................................................ 11
2.3 Conversion and Continuation of Loans.................... 13
2.4 Special Provisions Applicable to Adjusted LIBO
Rate Loans.............................................. 14
2.5 Requirements of Law..................................... 16
2.6 Determinations.......................................... 16
2.7 Payments and Computations............................... 17
2.8 Borrowing............................................... 17
2.9 Prepayment and Repayment................................ 17
ARTICLE III - SECURITY....................................... 18
3.1 Security Documents...................................... 18
3.2 Additional Documents.................................... 18
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF THE BORROWER.. 18
4.1 Good Standing of the Borrower; Authorization............ 18
4.2 Compliance with Laws and Other Agreements............... 18
4.3 No Conflict; Governmental Approvals..................... 18
4.4 Financial and Other Information Regarding Borrower...... 19
4.5 Taxes................................................... 19
4.6 Encumbrances and Guaranties............................. 19
4.7 Material Adverse Changes................................ 20
4.8 Margin Securities....................................... 20
4.9 ERISA................................................... 20
4.10 Pending Litigation...................................... 20
4.11 Valid, Binding and Enforceable.......................... 20
4.12 Priority of Mortgage.................................... 21
4.13 Priority of Security Interests.......................... 21
4.14 Environmental Matters................................... 21
4.15 No Untrue Statements.................................... 21
ARTICLE V - CONDITIONS PRECEDENT TO THE BANK'S OBLIGATIONS... 22
5.1 Documents and Items to be Delivered by the Borrower at
Closing................................................. 22
5.2 Bank's Audit............................................ 24
5.3 Additional Financing.................................... 24
5.4 Conditions Precedent to Making Line of Credit Loans..... 24
5.5 Conditions Subsequent................................... 24
ARTICLE VI - AFFIRMATIVE COVENANTS OF THE BORROWER........... 25
6.1 Use of Proceeds......................................... 25
6.2 Financial Statements.................................... 25
6.3 Ordinary Course of Business; Records.................... 26
6.4 Information for the Bank................................ 26
6.5 Insurance............................................... 27
6.6 Maintenance............................................. 28
6.7 Taxes................................................... 28
6.8 Leases.................................................. 28
6.9 Corporate Existence; Certain Rights; Laws............... 28
6.10 Notice of Litigation or Other Proceedings............... 28
6.11 Indebtedness............................................ 28
6.12 Notice of Events of Default............................. 28
6.13 ERISA................................................... 29
6.14 Deposit Accounts........................................ 29
6.15 Management.............................................. 29
6.16 Financial Covenants..................................... 29
6.17 Compliance with Environmental Laws...................... 29
6.18 Foreign Accounts........................................ 29
6.19 Further Actions......................................... 30
ARTICLE VII - NEGATIVE COVENANTS............................. 30
7.1 Fundamental Corporate Changes........................... 30
7.2 Indebtedness............................................ 30
7.3 Encumbrances............................................ 30
7.4 Guaranties.............................................. 31
7.5 Sales and Lease-Backs................................... 31
7.6 Loans, Investments...................................... 31
7.7 Change in Business...................................... 32
7.8 Sale or Discount of Receivables......................... 32
7.9 Prepayment of Indebtedness.............................. 32
7.10 ERISA................................................... 32
7.11 Restricted Payments..................................... 32
7.12 Compliance with Federal Reserve Board Regulations....... 32
7.13 Change in Ownership..................................... 33
ARTICLE VIII - EVENTS OF DEFAULT............................. 33
8.1 Borrower's Failure to Pay............................... 33
8.2 Breach of Covenants or Conditions....................... 33
8.3 Defaults in Other Agreements............................ 33
8.4 Agreements Invalid...................................... 33
8.5 False Warranties; Breach of Representations............. 34
8.6 Judgments............................................... 34
8.7 Bankruptcy or Insolvency of the Borrower................ 34
ARTICLE IX - REMEDIES........................................ 35
9.1 Further Advances; Acceleration; Setoff.................. 35
9.2 Further Remedies; Confession of Judgment................ 35
ARTICLE X - MISCELLANEOUS.................................... 37
10.1 Remedies Cumulative; No Waiver.......................... 37
10.2 Notices................................................. 37
10.3 Costs, Expenses and Attorneys' Fees..................... 38
10.4 Survival of Covenants................................... 39
10.5 Counterparts; Effectiveness............................. 39
10.6 Headings................................................ 39
10.7 Payment Due On A Day Other Than A Business Day.......... 39
10.8 Arbitration............................................. 39
10.9 Preservation and Limitation of Remedies................. 40
10.10 Governing Law......................................... 41
10.11 Integration........................................... 41
10.12 Amendment and Waiver.................................. 41
10.13 Successors and Assigns................................ 41
10.14 Severability of Provisions............................ 41
10.15 Consent to Jurisdiction and Service of Process........ 41
10.16 Indemnification....................................... 42
<PAGE>
REVOLVING CREDIT AGREEMENT
THIS REVOLVING CREDIT AGREEMENT ("Agreement"), dated as of
March 27, 1997, is between FIRST UNION NATIONAL BANK, a national
banking association (the "Bank"), and ENVIRONMENTAL TECTONICS
CORPORATION, a Pennsylvania corporation (the "Borrower").
BACKGROUND
The Bank and the Borrower desire to set forth the terms and
conditions under which the Bank will make available to the
Borrower certain credit facilities to be used for the purposes
specified in this Agreement. Accordingly, the Bank and the
Borrower, each intending to be legally bound hereby, agree as
follows:
ARTICLE I - DEFINITIONS
Terms used herein without definition that are defined in the
Uniform Commercial Code shall have the meanings ascribed to them
therein, unless the context requires otherwise. The following
terms shall have the following meanings in this Agreement:
"Account" shall have the meaning given to that term in the
Uniform Commercial Code and, in addition, shall include any right
to payment for goods sold or leased or services rendered which is
evidenced by an instrument or chattel paper.
"Adjusted Base Rate" shall mean the rate of interest equal
to the Base Rate less the Rate Reduction, if any.
"Adjusted Base Rate Loan" shall mean any Line of Credit Loan
accruing interest at the Adjusted Base Rate.
"Adjusted LIBO Rate" shall mean the interest rate equal to
the sum of LIBOR plus two and one-half percent (2.50%) less the
Rate Reduction, if any.
"Adjusted LIBO Rate Loan" shall mean any Line of Credit Loan
accruing interest at the Adjusted LIBO Rate.
"Affiliate" shall mean any Subsidiary of the Borrower and
any Person or entity that, now or hereafter, directly or
indirectly through one or more intermediaries, controls, is
controlled by or is under common ownership or control with the
Borrower. For purposes of this definition, the terms "control,"
"controls" and "controlled" shall refer to the power to determine
the management or policies of a Person, whether resulting from an
official position or capacity with such Person, direct or
indirect beneficial ownership of at least twenty percent (20%) of
the voting securities or other equity interests of such Person,
or otherwise.
"Agreement" shall mean this agreement, together with all
exhibits, amendments, modifications and supplements hereto as may
be in effect from time to time.
"Applicable Law" shall mean all applicable provisions of
(i) constitutions, statutes, rules, regulations and orders of
governmental authorities of any kind having jurisdiction over the
Bank or the Borrowers, (ii) authorizations, consents, approvals,
and licenses of such governmental authorities, (iii) Judgments,
and (iv) common law and equity.
"Applicable Rates" shall have the meaning given such term in
Section 2.2 hereof.
"Assignment of Claims" shall mean that assignment by the
Borrower to the Bank, dated the date of this Agreement, in form
and substance satisfactory to the Bank, of claims of the Borrower
upon the United States, as required pursuant to Article III of
this Agreement, together with all amendments, modifications,
exhibits and schedules thereto as may be in effect from time to
time.
"Bank" shall have the meaning specified in the initial
paragraph of this Agreement, together with its successors and
assigns.
"Base Rate" shall mean the floating annual rate of interest
that is designated from time to time by the Bank as the "Base
Rate" and is used by the Bank as a reference base with respect to
interest rates charged to borrowers. The determination and
statement of the Base Rate shall not in any way preclude the Bank
from making loans to other borrowers at rates which are higher or
lower than the Base Rate.
"Borrower" shall have the meaning specified in the initial
paragraph of this Agreement, together with its successors and
assigns.
"Business Day" shall mean any day upon which the Bank is
open for business at 123 South Broad Street, Philadelphia,
Pennsylvania.
"Capital Lease" shall mean any lease of property which, in
accordance with GAAP, should be capitalized on the lessee's
balance sheet.
"Capital Lease Obligation" shall mean the amount of the
liability which, according to GAAP, should be capitalized or
disclosed with respect to a Capital Lease.
"Chase Letters of Credit" shall have the meaning given to
such term in Section 7.2 hereof.
"Closing" shall mean the execution and delivery to the Bank
of all of the documents and instruments required by the terms of
this Agreement and the closing of the transactions contemplated
by this Agreement.
"Closing Date" shall mean the date on which the Closing
takes place.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Collateral" shall have the meaning set forth in the
Security Agreement.
"Copyright Assignment" shall mean the collateral assignment
by the Borrower to the Bank, dated the same date as this
Agreement, in form and substance satisfactory to the Bank, of
certain copyrights held by the Borrower, as required pursuant to
Article III of this Agreement, together with all amendments,
modifications, exhibits and schedules thereto as may be in effect
from time to time.
"Default Rate" shall mean the Base Rate plus two percent
(2%).
"Encumbrance" shall mean, as to any Person, any mortgage,
lien, pledge, adverse claim, charge, security interest or other
encumbrance in or on, or any interest or title of any vendor,
lessor, lender to, or other secured party of the Person under any
conditional sale or other title retention agreement or Capital
Lease with respect to, any property or asset of the Person.
"Environmental Laws" shall mean the Federal Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C.
Sections 9601, et. seq., the Federal Resource Conservation and Recovery
Act, 42 U.S.C. Sections 6901 et. seq., the Hazardous Materials
Transportation Act, 49 U.S.C. Sections 1801, et. seq., all other
federal, state and local environmental or health laws applicable
to the Borrower or its business, operations or assets now or
hereafter enacted, and all rules, regulations, orders and
publications adopted or promulgated pursuant thereto from time to
time.
"ERISA" shall mean the federal Employee Retirement Income
Security Act of 1974, as amended.
"Eurodollar Business Day" shall mean any day on which
relevant London international financial markets are open for
dealings in deposits of U.S. Dollars and which is also other than
a Saturday, Sunday or other day on which commercial banks are
authorized or permitted to close in Philadelphia, Pennsylvania.
"Event of Default" shall have the meaning set forth in
Article VIII of this Agreement.
"Federal Reserve Board" shall mean the Board of Governors of
the United States Federal Reserve System.
"Financial Statements" shall have the meaning set forth in
Section 4.4(a) of this Agreement.
"GAAP" shall mean generally accepted accounting principles,
as in effect at the time of application to the provisions hereof,
and consistently applied.
"Guarantors" shall mean Environmental Tectonics Corporation
(Europe) Limited and ETC International Corporation.
"Guarantor Security Agreements" shall mean that certain
Security Agreement, dated as of the same date of this Agreement,
by ETC International Corporation and that certain Debenture dated
as of the same date of this Agreement, by Environmental Tectonics
Corporation (Europe) Limited, each in form and substance
satisfactory to the Bank, as required by Article III of this
Agreement, together with all amendments, modifications, exhibits
and schedules thereto as may be in effect from time to time.
"Guaranty" shall mean any guaranty or agreement to be a
surety or other material contingent liability (other than any
endorsement for collection or deposit in the ordinary course of
business), direct or indirect, with respect to any obligation of
another Person.
"Guaranty Agreements" shall mean those certain Guaranties,
dated the same date of this Agreement, in form and substance
satisfactory to the Bank, by the Guarantors, as required by
Article III of this Agreement, together with all amendments,
modifications, exhibits and schedules thereto as may be in effect
from time to time.
"Hazardous Materials" shall mean all materials of any kind
which are flammable, explosive, toxic, radioactive or otherwise
hazardous to animal or plant life or the environment, including,
without limitation, "hazardous wastes," "hazardous substances"
and "contaminants," as such terms are defined by Environmental
Laws.
"Indebtedness" shall mean any obligation for borrowed money,
including, without limitation:
(a) any obligation owed for all or any part of the
purchase price of property or other assets or for the cost of
property or other assets constructed or of improvements thereto,
other than accounts payable included in current liabilities and
incurred in respect of property purchased in the ordinary course
of business;
(b) any Capital Lease Obligation; and
(c) any reimbursement obligations and other
obligations under any letter of credit, currency swap agreement,
interest rate swap, cap, collar or floor agreement or other
interest rate management devise, or any forward sale or purchase
agreement for foreign currencies.
"Interest Period" shall mean, with respect to any Adjusted
LIBO Rate Loan, a period of 30, 60 or 90 days' duration as the
Borrower may elect; provided, however, that (a) interest shall
accrue from and including the first day of each Interest Period
to, but excluding, the day on which such Interest Period expires;
(b) any Interest Period which would otherwise end on a day which
is not a Eurodollar Business Day shall be extended to the next
succeeding Eurodollar Business Day, unless such Eurodollar
Business Day falls in another calendar month, in which case such
Interest Period shall end on the next preceding Eurodollar
Business Day; and (c) with respect to any Interest Period which
begins on the last Eurodollar Business Day of a calendar month
(or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period) the
Interest Period shall end on the last Eurodollar Business Day of
a calendar month.
"Judgment" shall have the meaning set forth in Section 8.6
of this Agreement.
"Landlord's Waivers" shall mean landlord's waivers, in form
and substance satisfactory to the Bank, by Orlando TechCenter,
Ltd. as landlords of real property leased to the Borrower, as
required pursuant to Article III of this Agreement, together with
all amendments, modifications, exhibits and schedules thereto as
may be in effect from time to time.
"Letters of Credit" shall have the meaning set forth in
Section 2.1(b)(1) of this Agreement.
"Letter of Credit Fee Reduction" shall mean a reduction in
the letter of credit fee otherwise charged by the Bank to the
Borrower pursuant to Section 2.1(b)(2) of this Agreement. The
Letter of Credit Fee Reduction shall equal one-quarter of one
percent (0.25%) if the Borrower's Leverage Ratio is greater than
0.75 and less than 1.00. The Letter of Credit Fee Reduction
shall equal sixty-five one hundredths of one percent (0.65%) if
the Borrower's Leverage Ratio is less than or equal to 0.75.
"LIBOR" shall mean the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) determined by the Bank
pursuant to the following formula:
London InterBank Offered Rate
LIBOR = 1 - Reserve Percentage
For purposes of this Agreement, the term "London InterBank
Offered Rate" shall mean, for any Interest Period, as applied to
any Adjusted LIBO Rate Loan, the rate per annum reported on
Telerate page 3750 as of 11:00 a.m. London time (or as soon
thereafter as practicable) two Eurodollar Business Days prior to
the first day of such Interest Period or, if not so reported,
then as determined by the Bank from another recognized source of
interbank quotation.
"Line of Credit" shall mean the line of credit from the Bank
to the Borrower established pursuant to Section 2.1 of this
Agreement.
"Line of Credit Loans" shall mean the loans made by the Bank
to the Borrower pursuant to the Line of Credit.
"Line of Credit Note" shall have the meaning set forth in
Section 2.1 of this Agreement, together with all replacements,
amendments and renewals thereof.
"Loan Documents" shall mean this Agreement, the Security
Agreement, the Mortgage, the Note, the Patent Assignment, the
Trademark Assignment, the Copyright Assignment, the Guaranty
Agreements, the Guarantor Security Agreements, the Assignment of
Claims and all agreements, amendments, certificates, financing
statements, schedules, reports, notices, and exhibits now or
hereafter executed or delivered in connection with any of the
foregoing, as may be in effect from time to time.
"Loans" shall mean the Line of Credit Loans.
"Mortgage" shall mean a mortgage, dated the same day as this
Agreement, in form and substance satisfactory to the Bank, by
which the Borrower shall grant to the Bank a mortgage lien on
real property located at County Line Industrial Park,
Southampton, Pennsylvania, as required pursuant to Article III of
this Agreement, together with all amendments, modifications,
exhibits and schedules thereto as may be in effect from time to
time.
"Note" shall mean the Line of Credit Note, and all
replacements, amendments, extensions and renewals thereof.
"Obligations" shall mean the obligations of the Borrower:
(a) to pay the principal, interest, commitment fees
and any other liabilities of the Borrower to the Bank under this
Agreement and the other Loan Documents in accordance with the
terms thereof;
(b) to satisfy all of the other direct or indirect
liabilities of the Borrower to the Bank, whether hereunder or
otherwise, whether now existing or hereafter incurred, whether or
not evidenced by any note or other instrument, matured or
unmatured, direct, absolute or contingent, joint or several,
including any extensions, modifications, renewals thereof and
substitutions therefor;
(c) to repay the Bank all amounts advanced by the Bank
hereunder or otherwise on behalf of the Borrower, including, but
without limitation, advances for principal or interest payments
to prior secured parties, mortgagors or lienors, or for taxes,
levies, insurance, rent, wages, repairs to or maintenance or
storage of any Collateral; and
(d) to reimburse the Bank, on demand, for all of the
Bank's expenses and costs, including the reasonable fees and
expenses of its counsel, in connection with the negotiation,
preparation, administration, amendment, modification, or
enforcement of this Agreement and the documents required
hereunder, including all amounts payable under Section 10.3
hereof.
"Patent Assignment" shall mean the collateral assignment by
the Borrower to the Bank, dated the same date as this Agreement,
in form and substance satisfactory to the Bank, of certain
patents held by the Borrower, as required pursuant to Article III
of this Agreement, together with all amendments, modifications,
exhibits and schedules thereto as may be in effect from time to
time.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Person" shall mean any individual, corporation,
partnership, association, joint-stock company, trust,
unincorporated organization, joint venture, court or governmental
or political subdivision or agency thereof.
"Rate Reduction" shall mean a reduction in the Applicable
Base Rate or Applicable LIBO Rate, as applicable, charged by the
Bank to the Borrower pursuant to Section 2.2 of this Agreement.
The Rate Reduction shall equal one-quarter of one percent (0.25%)
if the Borrower's Leverage Ratio is greater than 0.75 and less
than 1.00. The Rate Reduction shall equal one half of one
percent (0.50%) if the Borrower's Leverage Ratio is less than or
equal to 0.75. The determination of whether the Borrower is
entitled to a Rate Reduction shall be made in connection with the
Borrower's delivery of the certificate required to be delivered
by the Borrower to the Bank pursuant to Section 6.2(b) of this
Agreement. Rate Reductions will become effective on the first
day of the subsequent fiscal quarter. Prior to the Borrower's
delivery of the first such Certificate, no Rate Reduction will be
available.
"Regulatory Change" means (a) the enactment or effectuation
after the date of this Agreement of any new, or change in any
existing, Applicable Law, (b) the adoption after such date of any
new, or the adoption or other effectuation after such date of any
change in any existing, interpretation, directive or request
(whether or not having the force of law), or (c) any change after
such date in the administration or enforcement of any Applicable
Law to which the Bank is subject. As used in this definition,
the "effectuation" of a change shall include, without limitation,
that consisting of or resulting from a determination of a court
or regulatory authority.
"Reserve Percentage" shall mean, for any Adjusted LIBO Rate
Loan for any Interest Period therefor, the maximum percentage
reserve requirement (rounded to the next highest 1/100 of 1% and
expressed as a decimal) in effect for any day during the Interest
Period under the Federal Reserve Board's Regulation D for
Eurocurrency Liabilities as defined therein.
"Revolving Facility Commitment" shall have the meaning set
forth in Section 2.1 of this Agreement.
"Security Agreement" shall mean the agreement between the
Borrower as debtor and the Bank as secured party, dated the same
date as this Agreement, in form and substance satisfactory to the
Bank, by which the Borrower shall grant security interests in
certain of its assets to the Bank, as required pursuant to
Article III hereof, together with all amendments, modifications,
exhibits, and schedules thereto as may be in effect from time to
time.
"Subordinated Debt" shall mean debt incurred by the Borrower
pursuant to: (i) that certain Debenture Purchase Agreement dated
March 27, 1997 by Sirrom Capital Corporation and Borrower;
(ii) that certain Stock Purchase Warrant dated March 27, 1997 by
Sirrom Capital Corporation and Borrower; and (iii) that certain
Preferred Stock Purchase Agreement by Sirrom Capital Corporation
and Borrower.
"Subordination Agreements" shall mean: (i) that certain
subordination agreement by and among the Bank, the Borrower and
Sirrom Capital Corporation, dated the same date of this
Agreement, in form and substance satisfactory to the Bank;
(ii) that certain Dividend Subordination Agreement by and between
the Bank, the Borrower and Sirrom Capital Corporation, dated the
same date of this Agreement, in form and substance satisfactory
to the Bank; and (iii) that certain subordination agreement by
and among the Bank, the Borrower, William F. Mitchell, Pete F.
Stephens and Pete F. Stephens Profit Sharing Plan, dated the same
date of this Agreement, in form and substance satisfactory to the
Bank as required pursuant to Article III of this Agreement,
together with all amendments, modifications, exhibits and
schedules thereto as may be in effect from time to time.
"Subsidiary" shall mean, as to any designated corporation,
any corporation, the outstanding shares of which having
sufficient voting power (not depending on the happening of a
contingency) to elect at least a majority of the members of its
board of directors, are at the time owned by the designated
corporation.
"Tax" means any federal, state or foreign tax, assessment or
other governmental levy or duty or other charge (including any
withholding tax) upon a person or entity or upon its assets,
revenues, income or profits, other than income and franchise
taxes imposed upon the Bank by the jurisdictions (or any
political subdivision thereof) in which the Bank or any office of
the Bank is located.
"Termination Date" shall initially mean May 31, 1999. The
Bank may, in its sole discretion, extend the Termination Date for
one or more additional one year periods by providing written
notice to the Borrower on or before the Termination Date.
"Trademark Assignment" shall mean the collateral assignment
by the Borrower to the Bank, dated the same date as this
Agreement, in form and substance satisfactory to the Bank, of
certain trademarks and other intangible property held by the
Borrower, as required pursuant to Article III of this Agreement,
together with all amendments, modifications, exhibits and
schedules thereto as may be in effect from time to time.
"Uniform Commercial Code" shall mean the Uniform Commercial
Code of Pennsylvania as codified at 13 Pa. C.S.A. Section 101 et seq.,
as in effect on the date of this Agreement.
ARTICLE II - CREDIT ACCOMMODATIONS
2.1 The Line of Credit. The Bank shall make available to
the Borrower, commencing on the Closing Date, a Revolving Credit
Facility in the maximum principal amount of $10,000,000.00 (the
"Revolving Facility Commitment"), upon the terms and conditions
set forth herein. After May 31, 1998, the Revolving Facility
Commitment shall be reduced to $9,000,000.
(a) Generally. At any time and from time to time
during the period commencing on the Closing Date and ending on
the Termination Date, upon the request of the Borrower, the Bank
shall provide to the Borrower a loan or loans which shall be used
by the Borrower for working capital and/or repayment of
indebtedness existing at the time of the Closing (the "Line of
Credit"). Subject to Section 2.2(b)(2), any loan request by the
Borrower shall be in a minimum amount of $100,000.00. To the
extent a loan request exceeds $100,000.00, such excess shall be
in multiples of $100,000.00. The Borrower may use the Line of
Credit during the period referred to in the preceding sentence by
borrowing, repaying and reborrowing in accordance with the terms
of this Agreement. On and before May 31, 1998, the aggregate
outstanding principal under the Line of Credit at any time shall
not exceed $9,000.000.00. After May 31, 1998, the aggregate
outstanding principal under the Line of Credit at any time shall
not exceed $8,000,000. If, at any time, the aggregate
outstanding principal under the Line of Credit exceeds: (i) on or
before May 31, 1998, $9,000,000.00 or (ii) after May 31, 1998,
$8,000,000.00, then, without any requirement of demand or notice
from the Bank, the Borrower shall immediately pay to the Bank the
amount of such excess. Upon the Termination Date, unless the
same has been extended by written agreement between the Bank and
the Borrower (which the Bank shall provide, if at all, no later
than forty-five (45) days prior to the Termination Date), the
Bank's commitment to make Line of Credit Loans shall terminate,
all Line of Credit Loans shall immediately mature and all
Obligations under the Revolving Credit Facility shall be
immediately due and payable in full.
(b) Letters of Credit.
(1) Generally. In addition to making loans to
the Borrower under the Line of Credit as provided in
Section 2.1(a) hereof, the Bank shall, upon the request of the
Borrower and subject to the terms of this Agreement, also issue
one or more standby letters of credit ("Letters of Credit") for
the account of the Borrower to benefit customers of the Borrower
that have advanced funds to the Borrower or have executed
maintenance contracts with the Borrower. The cumulative face
amount of all outstanding Letters of Credit, together with the
Chase Letters of Credit, shall at no time exceed $2,000,000.00.
All amounts drawn under Letters of Credit shall be deemed to be
evidenced by the Line of Credit Note, and the amount available to
be borrowed under the Revolving Credit Facility shall be reduced
by the aggregate amounts drawn and available to be drawn at any
time under all outstanding Letters of Credit. In no event shall
the aggregate amount available to be drawn on all outstanding
Letters of Credit plus the Chase Letters of Credit plus the
outstanding principal balance of Line of Credit Loans exceed the
Revolving Facility Commitment. In such an event, the Borrower
shall immediately pay to the Bank the amount of such excess. The
duration of any Letters of Credit shall not extend beyond the
Termination Date without the prior written consent of the Bank.
Upon an Event of Default under this Agreement, the Bank may, at
its option, cause to be advanced Adjusted Base Rate Loans from
the Revolving Credit Facility in an amount up to the face amount
of the Letters of Credit. The proceeds of any advance made
pursuant to this paragraph shall be deposited with the Bank in a
deposit account maintained at the Bank which shall constitute a
portion of the Collateral. In the event that any outstanding
Letters of Credit are thereafter returned to the Bank without any
drafts or demands for payment having been made thereon, then from
any sums then on deposit in the foregoing account an amount shall
be applied to the then outstanding principal balance of the
Revolving Credit Facility which is equal to the face amount of
each such returned Letter of Credit.
(2) Issuance of Letters of Credit. Subject to
the provisions of Section 2.1(b)(1), the Bank shall issue Letters
of Credit for the account of the Borrower, provided that the
Borrower (i) provides a written request for each such Letter of
Credit specifying the terms thereof, including, without
limitation, the amount and the name and address of the
beneficiary of such Letter of Credit; (ii) executes and delivers
to the Bank an application for each such Letter of Credit
pursuant to the form provided for such purpose by the Bank; and
(iii) executes and delivers to the Bank such other documents and
instruments which the Bank, in its sole and absolute discretion,
deems reasonable and necessary. The Borrower shall pay to the
Bank on the date of issuance of each Letter of Credit hereunder a
fee equal to the face amount of the Letter of Credit multiplied
by 1.5% less the Letter of Credit Fee Reduction, if any. The
foregoing fees may be deducted by the Bank from the Borrower's
accounts maintained at the Bank as such fees are incurred. The
determination of whether the Borrower is entitled to a Letter of
Credit Fee Reduction shall be made in connection with the
Borrower's delivery of the certificate required to be delivered
by the Borrower to the Bank pursuant to Section 6.2 of this
Agreement. Letter of Credit Fee Reductions for future Letters of
Credit will become effective upon the first Business Day of the
fiscal quarter following the Bank's receipt of the above-
described certificate.
(c) Interest. Interest shall accrue on all loans
outstanding under the Line of Credit at the rate or rates set
forth in Section 2.2 hereof.
(d) Line of Credit Note. The obligations of the
Borrower to repay the aggregate outstanding principal under the
Revolving Credit Facility and to pay accrued interest on Line of
Credit Loans shall be evidenced by a promissory note, in form and
substance satisfactory to the Bank, to be executed and delivered
to the Bank concurrently with the execution and delivery of this
Agreement (the "Line of Credit Note").
(e) Commitment Fees. In addition to any and all other
fees required to be paid by the Borrower in accordance with the
terms of this Agreement, the Borrower shall pay to the Bank on
the first Business Day of each of Borrower's fiscal quarters a
commitment fee equal to 0.05% of the average unused balance of
the Revolving Facility Commitment during the preceding fiscal
quarter.
2.2 Interest. Interest shall accrue on the outstanding
principal amounts of the Line of Credit Loans in accordance with
the following provisions:
(a) Applicable Rates. At the Borrower's election, the
Line of Credit Loans shall bear interest at any one of the
following rates (the "Applicable Rates"):
(1) the Adjusted Base Rate, such rate to change
simultaneously and automatically upon the Bank's designation of
any change in the Base Rate; or
(2) the Adjusted LIBO Rate.
(b) Determination of Interest Periods and Applicable
Rates. Interest Periods and the Applicable Rates shall be chosen
with respect to Line of Credit Loans as follows:
(1) The Borrower may ask the Bank for indications
of LIBOR for specified Line of Credit Loans and Interest Periods,
as applicable, at any time. If the Borrower anticipates that it
may elect the Adjusted LIBO Rate to be applicable to a Line of
Credit Loan, the Borrower shall request an indication of LIBOR
prior to 11:00 a.m. (Philadelphia time) at least three Eurodollar
Business Days prior to the commencement of the applicable
Interest Period, and if the Borrower desires to elect the
Adjusted LIBO Rate for such Interest Period, the Borrower must
accept such indication of LIBOR by notice to the Bank in writing
or by telephone (confirmed promptly in writing) prior to
11:00 a.m. (Philadelphia time) on the date of acceptance, which
shall be at least two Eurodollar Business Days prior to the
commencement of the Interest Period selected by the Borrower. If
the Borrower does not provide the applicable notice of election
of the Adjusted LIBO Rate, then the Borrower shall be deemed to
have requested that the Adjusted Base Rate apply to any Line of
Credit Loan which is subject to any expiring Interest Period and
to any new Line of Credit Loan, as the case may be, until the
Borrower shall have given appropriate notice of a requested
change in or determination of the rate of interest in accordance
with this Section 2.2. No acceptance of an indication of rate
hereunder shall bind the Bank unless timely made.
(2) The Borrower shall not request and the Bank
shall not be required to provide, an indication of LIBOR with
respect to a specified Interest Period for any Line of Credit
Loan of less than $500,000.
(3) All determinations and quotations of rate by
the Bank hereunder shall be conclusive and binding upon the
Borrower, in the absence of manifest error.
(4) If no Interest Period is elected with respect
to any Adjusted LIBO Rate Loan, the request for such Line of
Credit Loan shall be deemed to be a request for a thirty day
Interest Period in respect of any such Adjusted LIBO Rate Loan.
(5) Upon the occurrence of any Event of Default
and a resulting acceleration of Obligations pursuant to
Section 9.1(b) hereof, all Interest Periods shall automatically
terminate and all Adjusted LIBO Rate Loans shall be automatically
converted to Loans bearing interest at the Default Rate and shall
be subject to the payment of all amounts then due with respect to
such termination under Section 2.4 hereof.
(c) Payment of Interest. Notwithstanding anything to
the contrary in this Agreement, the Borrower shall pay interest
accruing at the Adjusted LIBO Rate monthly in arrears on the
first Business Day of each consecutive calendar month during an
Interest Period commencing on the first such date next succeeding
the date on which such Interest Period commenced, and on the
expiration date of such Interest Period. The Borrower shall pay
interest on all Line of Credit Loans other than Adjusted LIBO
Rate Loans monthly in arrears on the first day of each
consecutive calendar month commencing with the month immediately
following the date on which the first advance under the Line of
Credit is made. All accrued but unpaid interest under the Note
shall be payable, without demand, on the maturity thereof
(whether by its stated terms, or upon prepayment, acceleration or
otherwise).
(d) Default Rate. Notwithstanding anything to the
contrary contained in this Section 2.2, upon the occurrence of an
Event of Default under this Agreement, all Line of Credit Loans
shall bear interest at the Default Rate.
2.3 Conversion and Continuation of Loans. The Borrower may
convert any Line of Credit Loan to an Adjusted LIBO Rate Loan or
continue any Adjusted LIBO Rate Loan subject to an expiring
Interest Period for an additional Interest Period upon the same
advance notice required pursuant to Section 2.2 hereof, subject,
however, to the all of the terms of this Agreement, including,
without limitation, the following:
(a) Rate Availability. An Adjusted LIBO Rate shall be
available, notwithstanding Section 2.4(a) hereof.
(b) Limitation on Interest Period. No Interest Period
may be elected with respect to any Line of Credit Loan (i) which
would expire after the Termination Date in the case of an
Adjusted LIBO Rate Loan, or (ii) for a period other than those
referred to in the definition of "Interest Period" set forth in
Article I hereof.
(c) Payment of Interest; No Default. All interest
accrued under an expiring Interest Period shall be paid by the
Borrower on the last day of such Interest Period, and no
continuation or conversion of a Line of Credit Loan subject to an
expiring Interest Period shall be made for so long as an Event of
Default shall be continuing.
(d) Timing. No continuation or conversion of an
Adjusted LIBO Rate Loan may be effected on other than the last
day of the Interest Period then in effect with respect to such
Adjusted LIBO Rate Loan, and a Line of Credit Loan which is not
an Adjusted LIBO Rate Loan may be converted into an Adjusted LIBO
Rate Loan only on a Eurodollar Business Day.
(e) Failure to Give Notice. In the event that the
Borrower shall not give notice to continue any Adjusted LIBO Rate
Loan into a subsequent Interest Period in accordance with
Section 2.2 hereof, the Borrower shall be deemed to have
requested that such Adjusted LIBO Rate Loan (unless repaid) be
converted to one accruing interest at the Adjusted Base Rate, at
the expiration of the then current Interest Period.
2.4 Special Provisions Applicable to Adjusted LIBO Rate
Loans. The following special provisions shall apply to Adjusted
LIBO Rate Loans:
(a) Mandatory Suspension and Conversion of Adjusted
LIBO Rate Loans. The Bank's obligations to make, maintain or
convert into Adjusted LIBO Rate Loans of any type shall be
suspended, all outstanding Adjusted LIBO Rate Loans shall be
converted on the last day of their applicable Interest Periods
(or, if earlier, in the case of clause (2) below, on the last day
the Bank may lawfully continue to maintain Adjusted LIBO Rate
Loans or, in the case of clause (3) below, the day determined by
such Bank to be the last Business Day before the effective date
of the applicable restriction) into, and all pending requests for
the making of or conversion into Adjusted LIBO Rate Loans shall
be deemed requests for, Line of Credit Loans at the Adjusted Base
Rate if:
(1) on or prior to the determination of the
interest rate for an Adjusted LIBO Rate Loan for any Interest
Period, the Bank determines that for any reason appropriate
quotations are not available to it (including, quotations in the
interbank market selected by it for deposits with it) for
purposes of determining the Adjusted LIBO Rate or in the good
faith reasonable judgment of the Bank, that such rate would not
accurately reflect the cost to the Bank of making, maintaining or
converting into an Adjusted LIBO Rate Loan of such type for such
Interest Period;
(2) at any time the Bank determines, in the
exercise of its good faith reasonable judgment, that any
Regulatory Change makes it unlawful or impracticable for such
Bank to make or maintain any Adjusted LIBO Rate Loan, or to
comply with its obligations hereunder in respect thereof; or
(3) the Bank determines, in the exercise of its
good faith reasonable judgment, that by reason of any Regulatory
Change it is restricted, directly or indirectly, in the amount
that it may hold of (x) a category of liabilities that include
deposits by reference to which, or on the basis of which, the
interest rate applicable to Adjusted LIBO Rate Loans is directly
or indirectly determined, or (y) the category of assets that
includes Adjusted LIBO Rate Loans.
The Bank shall promptly give notice to the Borrower of
any circumstance that would make the provisions of this
Section 2.4(a) applicable, but the failure to give any such
notice shall not affect such Bank's rights hereunder.
(b) Regulatory Changes. If any Regulatory Change:
(1) shall subject the Bank to any Tax determined
by the Bank to be applicable to any Adjusted LIBO Rate Loan, to
the Bank's obligation to make or maintain any such Adjusted LIBO
Rate Loan, to this Agreement or the Note, or shall, in the
determination of the Bank, change the basis of taxation of
payments to the Bank of the principal of or interest on any
Adjusted LIBO Rate Loan or of any other amounts payable under
this Agreement in respect of any Adjusted LIBO Rate Loan or its
obligation to make or maintain any Adjusted LIBO Rate Loan; or
(2) shall impose, increase, modify or deem
applicable any Tax, reserve, insurance charge, special deposit,
assessment or other requirement or condition (other than reserves
and assessments taken into account in the calculation of the
Adjusted LIBO Rate) against assets of, deposits with or to the
account of, credit extended by, or the obligations of the Bank
under this Agreement, or shall impose on the Bank or on any
relevant interbank market for U.S. Dollars, any condition; and
the result of the foregoing, in the determination of the Bank, is
to (x) reduce the amount of any sum received or receivable by the
Bank with respect to any Adjusted LIBO Rate Loan or the return to
be earned by the Bank on any such Loan, (y) impose a cost on the
Bank that is attributable to the making or maintaining of, or its
commitment to make, any such Adjusted LIBO Rate Loan, or
(z) require the Bank to make any payment on, or calculated by
reference to, the gross amount of any amount received by it
hereunder or under any such Loan, then, within 15 days after
request by the Bank, the Borrower shall pay to the Bank such
additional amount or amounts as the Bank determines will
compensate the Bank for such reduction, increased cost or
payment. The Bank will promptly notify the Borrower of any
Regulatory Change of which it has knowledge that will entitle the
Bank to compensation pursuant to this Section 2.4(b), but the
failure to give such notice shall not affect the Bank's right to
such compensation. The Bank agrees to take any reasonable action
which the Bank determines, in its discretion, may be available
without cost or expense to the Bank in order to eliminate or
mitigate the effect of such Regulatory Change.
(c) Funding Losses. The Borrower shall pay to the
Bank, upon request, such amount or amounts as the Bank determines
are necessary to compensate it for any loss, cost or expense
incurred by it as a result of (i) any payment, prepayment or
conversion of an Adjusted LIBO Rate Loan on a date other than the
last day of an Interest Period for such Adjusted LIBO Rate Loan
or (ii) an Adjusted LIBO Rate Loan for any reason not being made
or converted, or any payment of principal thereof or interest
thereon not being made, on the date therefor determined in
accordance with the applicable provisions of this Agreement.
Such amount shall equal the excess of (x) the interest that would
have been received from the Borrower under this Agreement on any
amounts to be redeployed during an Interest Period or its
remaining portion over (y) the interest component of the return
that the Bank determines it could have obtained had it placed
such amount on deposit in the interbank market selected by it for
a period equal to such Interest Period or its remaining portion.
2.5 Requirements of Law. In the event that after the date
hereof, any change in any law, regulation or treaty or in the
interpretation or application thereof or compliance by the Bank
with any request or directive (whether or not having the force of
law) from any central bank or other governmental authority,
agency or instrumentality:
(a) subjects or shall subject the Bank to any tax of
any kind whatsoever with respect to this Agreement, the loans
made hereunder or the issuance or maintenance of the Letters of
Credit hereunder, or changes the basis of taxation of payments to
the Bank of principal, commitment fees, interest or any other
amount payable hereunder (except for changes in the rate of tax
on the overall net income of the Bank);
(b) imposes, modifies or holds or shall impose, modify
or hold applicable any reserve, special deposit, compulsory loan
or similar requirement against assets held by, or deposits or
other liabilities in or for the account of, advances or loans by,
or other credit extended by, or any other acquisition of funds
by, any office of the Bank, which reserve, special deposit,
compulsory loan or similar requirement is not otherwise included
in determination of the interest rate hereunder;
(c) imposes or shall impose on the Bank any other
condition;
and the result of any of the foregoing is to, directly or
indirectly, increase the cost to the Bank of making, renewing or
maintaining advances or extensions of credit or issuing or
maintaining Letters of Credit or to reduce any amount receivable
thereunder then, in any such case, the Borrower shall promptly
pay the Bank, upon its demand, any additional amounts necessary
to compensate the Bank for such additional cost or reduced amount
receivable. If the Bank becomes entitled to claim any additional
amounts pursuant to this subsection, it shall promptly notify the
Borrower of the event by reason of which it has become so
entitled. The good faith determination as to any additional
amounts payable pursuant to the foregoing sentence by the Bank
shall be conclusive in the absence of manifest error.
2.6 Determinations. In making the determinations
contemplated by Section 2.4 and 2.5 hereof the Bank may make such
estimates, assumptions, allocations and the like that it, in good
faith, determines to be appropriate. All such determinations
shall be final, binding and conclusive upon the Borrower, except
to the extent of any manifest error in computation or
transmission. The Bank shall furnish to the Borrower, upon
request, a certificate outlining in reasonable detail the
computation of any amounts claimed by it under Section 2.4 or 2.5
and the assumptions underlying such computations, provided that
the failure to deliver a certificate shall not affect the Bank's
right to such amounts.
2.7 Payments and Computations. All amounts payable by the
Borrower to the Bank under this Agreement or the Note shall be
paid directly to the Bank in immediately available funds at the
address of the Bank set forth in Section 10.2 hereof or at such
other address of which the Bank shall give notice to the Borrower
pursuant to Section 10.2 hereof. The Bank is authorized to
charge any account of the Borrower at the Bank for any payment
due by the Borrower under this Agreement or the Note.
Computation of interest hereunder with respect to Adjusted LIBO
Rate Loans hereunder shall be made by the Bank on the basis of a
year of 360 days for the actual number of days elapsed.
Computation of interest hereunder with respect to Adjusted Base
Rate Loans hereunder shall be made by the Bank on the basis of a
year of 365/366 days (as applicable) for the actual number of
days elapsed. All payments under the Note shall be applied by the
Bank to the Obligations in its sole and absolute discretion.
2.8 Borrowing. The Borrower shall notify the Bank of each
proposed borrowing under the Line of Credit not later than
2:30 p.m., Philadelphia, Pennsylvania time on the day of the
proposed borrowing, except as otherwise provided in Section 2.2
with respect to Adjusted LIBO Rate Loans.
2.9 Prepayment and Repayment. Subject to Section 2.4 of
this Agreement, the Borrower may make payments and prepayments of
the Loans in whole or in part at any time and from time to time
without penalty or premium upon notification to the Bank not
later than 2:30 p.m. Philadelphia, Pennsylvania time on the date
of the proposed payment or prepayment.
The Bank may, and the Borrower authorizes the Bank to
debit the Borrower's accounts at the Bank for the amount of any
payment as and when such payment becomes due hereunder. If there
are insufficient funds in such debited account at the time such
account is debited, and the debiting creates an overdraft, the
Bank may charge the Borrower an administrative fee in an amount
established from time to time by the Bank. Such authorization
for the Bank to debit the Borrower's accounts at the Bank shall
not affect the Borrower's obligation to pay when due all amounts
payable hereunder, whether or not there are sufficient funds in
accounts of the Borrower. The foregoing rights of the Bank to
debit the Borrower's accounts shall be in addition to, and not in
limitation of, any rights of set-off which the Bank may have
hereunder or under any other Loan Document.
ARTICLE III - SECURITY
3.1 Security Documents. As security for the prompt
payment, performance, satisfaction and discharge when due of all
the Obligations, the Borrower shall execute and deliver or shall
cause to be executed and delivered to the Bank, concurrently with
the execution of this Agreement, the Security Agreement, the
Mortgage, the Patent Assignment, the Trademark Assignment, the
Copyright Assignment, the Assignment of Claims, the Guaranty
Agreement and the Guarantor Security Agreement.
3.2 Additional Documents. The Borrower shall execute and
deliver and/or cause to be executed and delivered, concurrently
with the execution of this Agreement, the Subordination
Agreements and the Landlord's Waivers.
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF THE BORROWER
In order to induce the Bank to execute and deliver this
Agreement and to make the Loans available to the Borrower, the
Borrower represents and warrants to the Bank that, as of the date
hereof:
4.1 Good Standing of the Borrower; Authorization. The
Borrower is duly incorporated, organized and existing and in good
standing in the Commonwealth of Pennsylvania and is duly
qualified as a foreign corporation and authorized to do business
in all other jurisdictions wherein the nature of its business or
property makes such qualification necessary, except where the
failure to so qualify would not have a material adverse effect on
the financial condition or results of operations of the Borrower.
The Borrower has the corporate power to own its properties and to
carry on its business as now conducted. The execution, delivery
and performance of this Agreement and the other Loan Documents
have been duly authorized by all necessary corporate proceedings
on the part of the Borrower.
4.2 Compliance with Laws and Other Agreements. The
Borrower is in compliance with all laws, rules, regulations,
judgments, decrees, orders, agreements and requirements which
affect in any material way the Borrower, its assets or the
operation of its business and has not received, and has no
knowledge of, any order or notice of any governmental
investigation or of any violation or claim of violation of any
law, regulation, judgment, decree, order, agreement, or other
governmental requirement.
4.3 No Conflict; Governmental Approvals. The execution,
delivery, and performance of this Agreement and each of the other
Loan Documents will not (i) conflict with, violate, constitute a
default under, or result in a breach of any provision of any
applicable law, rule, regulation, judgment, decree, order,
instrument or other agreement, or (ii) conflict with or result in
a breach of any provision of the certificate of incorporation or
by-laws of the Borrower. No authorization, permit, consent or
approval of or other action by, and no filing, registration or
declaration with, any governmental authority or regulatory body
is required to be obtained or made by the Borrower for the due
execution, delivery and performance of this Agreement or any of
the Loan Documents, except such as have been duly obtained or
made prior to the Closing Date and are in full force and effect
as of the Closing Date (copies of which have been delivered to
the Bank on or before the Closing Date).
4.4 Financial and Other Information Regarding Borrower.
(a) The Borrower has delivered to the Bank true,
correct and complete copies of audited financial statements as of
February 23, 1996 and internally prepared financial statements of
the Borrower as of November 29, 1996. Those financial statements
("Financial Statements") present fairly the financial position of
the Borrower as of February 23, 1996 and November 29, 1996 and
the results of the operations of the Borrower for the periods
then ended in conformity with GAAP.
(b) The Borrower has no Indebtedness other than as
shown in the most recent Financial Statements.
(c) The Borrower has no "investment" (as such term is
defined under GAAP), whether by stock purchase, capital
contribution, loan, advance, purchase of property or otherwise,
in any Person, other than as shown in the most recent Financial
Statements.
4.5 Taxes. The Borrower is not delinquent in payment of
any income, property or other tax, except for any delinquency in
the payment of a tax which is contested in good faith by the
Borrower and for which appropriate reserves have been established
in accordance with GAAP.
4.6 Encumbrances and Guaranties.
(a) All properties and assets of the Borrower are
owned by the Borrower free and clear of all Encumbrances except
(i) those for taxes or other government charges either not yet
delinquent or the nonpayment of which is permitted by Section 4.5
of this Agreement; (ii) those not arising in connection with
Indebtedness that do not materially impair the use or value of
the properties or assets of the Borrower in the conduct of its
businesses; (iii) Encumbrances whose release and termination is
evidenced by the Borrower's delivery to the Bank of appropriate
documents on the Closing Date; (iv) the Loan Documents and
Encumbrances otherwise permitted under the Security Agreement and
the Mortgage; and (v) Encumbrances disclosed in the most recent
Financial Statements.
(b) The Borrower is not obligated under any Guaranty.
4.7 Material Adverse Changes. Since November 29, 1996,
there has not been any material adverse change in the business,
operations, properties or financial position of the Borrower.
The Borrower does not know of any fact (other than matters of a
general economic or political nature) which materially adversely
affects, or, so far as the Borrower can now reasonably foresee,
will materially adversely affect, the business, operations,
properties or financial position of the Borrower or the
performance by the Borrower of its obligations under this
Agreement and the other Loan Documents.
4.8 Margin Securities. The assets of the Borrower do not
include any "margin securities" within the meaning of
Regulations G or U of the Board of Governors of the Federal
Reserve System (12 C.F.R. 207, 221), and the Borrower does not
have any present intention of acquiring any margin security.
4.9 ERISA. The provisions of each employee benefit plan as
defined in Section 3(3) of ERISA ("Plan") maintained by the
Borrower complies with all applicable requirements of ERISA and
of the Code, and with all applicable rulings and regulations
issued under the provisions of ERISA and the Code setting forth
those requirements. Except as listed on Schedule 4.9 hereof, no
reportable event, as defined in Section 4043 of ERISA, has
occurred with respect to any Plan; no Plan to which Section 4021
of ERISA applies has been terminated; no Plan has incurred any
liability to PBGC as provided in Section 4062, 4063 and 4064 of
ERISA; no Plan has been involved in any prohibited transaction
within the meaning of Section 406 of ERISA or Section 4975 of the
Code; and there are no unfunded liabilities with respect to any
Plan which are not disclosed in the Financial Statements.
4.10 Pending Litigation. There are no actions, suits,
proceedings or investigations pending, or, to the knowledge of
the Borrower, threatened against or affecting the Borrower,
before any court, arbitrator or administrative or governmental
body which, in the aggregate, might adversely affect any action
taken or to be taken by the Borrower under this Agreement and the
other Loan Documents or which, in the aggregate, might materially
adversely affect the business, operations, properties or
financial position of the Borrower, or the ability of the
Borrower to perform its obligations under this Agreement and the
other Loan Documents.
4.11 Valid, Binding and Enforceable. This Agreement and the
other Loan Documents have been duly and validly executed and
delivered by the parties thereto (other than the Bank) and
constitute the valid and legally binding obligations of such
parties enforceable in accordance with their respective terms,
except as enforcement of this Agreement and the other Loan
Documents may be limited by bankruptcy, insolvency or other laws
of general application relating to or affecting the enforcement
of creditors' rights and except as enforcement is subject to
general equitable principles.
4.12 Priority of Mortgage. The Mortgage, when recorded in
the office of the Recorder of Deeds of Bucks County,
Pennsylvania, will create a valid mortgage lien on the real
property described therein, subject only to such Encumbrances as
may be expressly permitted by the Mortgage and the Security
Agreement.
4.13 Priority of Security Interests. The Security
Agreement, upon the filing of financing statements in the
appropriate governmental offices, will create valid first
perfected security interests in the personal property of the
Borrower described therein as collateral for all the Obligations
subject to no prior Encumbrances.
4.14 Environmental Matters.
(a) The Borrower has performed all of its obligations
under, has obtained all necessary approvals, permits,
authorizations and other consents required by, and is not in
material violation of, any Environmental Laws.
(b) The Borrower has not received any notice,
citation, summons, directive, order or other communication,
written or oral, from, and the Borrower has no knowledge of the
filing or giving of any such notice, citation, summons,
directive, order or other communication by, any governmental or
quasi-governmental authority or agency or any other Person
concerning the presence, generation, treatment, storage,
transportation, transfer, disposal, release or other handling of
any Hazardous Materials within, on, from, related to, or
affecting any real property owned or occupied by the Borrower.
(c) To the best of the Borrower's knowledge, after
reasonable inquiry, no real property owned or occupied by the
Borrower has ever been used, either by the Borrower or any of its
predecessors in interest, to generate, treat, store, transport,
transfer, dispose of, release or otherwise handle any Hazardous
Material in violation of any applicable Environmental Laws.
(d) To the best of the Borrower's knowledge, after due
inspection, there are no Hazardous Materials within, on or under
any real property owned or occupied by the Borrower in violation
of any applicable Environmental Laws.
4.15 No Untrue Statements. Neither this Agreement, the Loan
Documents nor any other document, certificate or statement
furnished or to be furnished by the Borrower or by any other
party to the Bank in connection herewith contains, or at the time
of delivery will contain, any untrue statement of a material fact
or omits or will omit to state a material fact necessary in order
to make the statements contained herein and therein not
misleading.
ARTICLE V - CONDITIONS PRECEDENT TO THE BANK'S OBLIGATIONS
The Bank's obligations hereunder are conditioned upon the
satisfaction of the following conditions precedent:
5.1 Documents and Items to be Delivered by the Borrower at
Closing. The Borrower shall deliver or cause to be delivered to
the Bank at the Closing the following:
(a) This Agreement duly executed by the Borrower;
(b) The Note duly executed by the Borrower;
(c) The Security Agreement duly executed by the
Borrower, together with such Uniform Commercial Code financing
statements and other documents as the Bank may reasonably require
to be executed by the Borrower;
(d) The Mortgage duly executed by the Borrower and
acknowledged, in form suitable for recording;
(e) The Patent Assignment duly executed by the
Borrower and acknowledged in form suitable for recording;
(f) The Trademark Assignment duly executed by the
Borrower and acknowledged, in form suitable for recording;
(g) The Copyright Assignment;
(h) The Assignment of Claims duly executed by the
Borrower;
(i) The Guaranty Agreements duly executed by the
Guarantors;
(j) The Guarantor Security Agreements duly executed by
the Guarantors;
(k) Evidence of the Borrower's having complied with
those covenants regarding insurance as are contained in this
Agreement and the other Loan Documents;
(l) A certificate of the Secretary or an Assistant
Secretary of the Borrower dated the Closing Date including
(i) resolutions duly adopted by the Borrower authorizing the
transactions under the Loan Documents; (ii) a copy of the by-laws
of the Borrower; (iii) evidence of the incumbency and signature
of the officers executing on its behalf any of the Loan Documents
and any other document to be delivered pursuant to any such
documents, together with evidence of the incumbency of such
Secretary or Assistant Secretary; (iv) a copy, certified by the
Pennsylvania Secretary of State, as of the most recent date
practicable, of the Borrower's Articles and Certificate of
Incorporation, together with the certification of the Secretary
or Assistant Secretary of the Borrower as of the Closing Date
that such Articles and Certificate of Incorporation have not been
amended since the date of the aforesaid certification by the
Secretary of State; and (v) certificates of authority or good
standing for the Borrower from its jurisdiction of incorporation
and any other jurisdiction where the Borrower is qualified to do
business;
(m) A copy of each and every authorization, permit,
consent, and approval of and other action by, and notice to and
filing with, every governmental authority and regulatory body
which is required to be obtained or made by the Borrower for the
due execution, delivery and performance of this Agreement and the
other Loan Documents;
(n) Policies of title insurance issued by a title
company satisfactory to the Bank insuring the Mortgage, as a
valid mortgage lien, subject only to exceptions approved by the
Bank;
(o) The opinion of Stevens & Lee, dated as of Closing
Date, in form and substance satisfactory to the Bank and its
counsel;
(p) To the extent not paid by the Borrower to the Bank
prior to the Closing, a facility fee of $75,000.00;
(q) Appraisals of: (i) Borrower's real estate located
at County Line Industrial Park, Southampton, PA and
(ii) Borrower's machinery and equipment, which appraisals shall
be prepared at the Borrower's expense, shall be satisfactory in
form and substance to the Bank and shall indicate that the total
fair market value of the above-described real property, together
with Borrower's appraised machinery and equipment, is not less
than $2,500,000.00;
(r) An environmental risk assessment database report,
which report shall be prepared at Borrower's expense, with
respect to the Borrower's real estate located at County Line
Industrial Park, Southampton, Pennsylvania and the surrounding
area, which report shall be satisfactory to the Bank in its sole
and absolute discretion;
(s) Management prepared Financial Statements for the
year ended February 28, 1997 evidencing results satisfactory to
the Bank, in the Bank's sole and absolute discretion;
(t) Evidence that all Accounts owing by Account
debtors located in countries which the Bank has rated "Country
Risk Rate 3" or worse are supported by a letter of credit
acceptable to the Bank in its sole and absolute discretion;
(u) A twelve-month budget of cash flows sufficient for
the Bank to match actual cash flows to projected cash flows for
individual existing and anticipated contracts;
(v) A list of all Accounts supported by a letter of
credit, including a summary of limitations or conditions with
respect to such letter of credit.
5.2 Bank's Audit. The Bank or the Bank's designee's
completion of an audit of Borrower's Accounts, inventory, costs
in excess of billings, accounts payable and billings in excess of
costs which audit shall be acceptable to the Bank, in both its
scope and its conclusions, in the Bank's sole and absolute
discretion. The cost of such audit shall be borne by the
Borrower.
5.3 Additional Financing. The Borrower's obtaining:
(a) $4,000,000 of unsecured, subordinated debt upon
terms and conditions satisfactory to the Bank in its sole and
absolute discretion; and
(b) $2,500,000 of non-cumulative, convertible,
preferred stock upon terms and conditions satisfactory to the
Bank in its sole and absolute discretion.
5.4 Conditions Precedent to Making Line of Credit Loans.
The Bank shall not be obligated to make any Line of Credit Loans
hereunder or make Letters of Credit available hereunder unless:
(a) As of the date of the proposed advance, no Event
of Default has occurred and is continuing and no event has
occurred and is continuing which, with the giving of notice or
lapse of time, or both, would constitute an Event of Default;
(b) The representations and warranties contained in
Article IV are true and correct on the date of the proposed
advance, except that the representations and warranties in
Section 4.4 shall refer to the financial statements most recently
supplied to the Bank pursuant to Section 6.2 of this Agreement;
(c) No material adverse change has occurred in the
financial condition of the Borrower since the date hereof; and
(d) The Borrower has delivered to the Bank, upon the
Bank's request, a certificate executed by the chief executive
officer of the Borrower confirming the statements made in
paragraphs (a), (b), and (c) above.
5.5 Conditions Subsequent. The Borrower shall deliver or
cause to be delivered, on or before April 14, 1997, the
opinion(s) of Stevens & Lee, in form and substance satisfactory
to the Bank and its counsel with respect to each of the
Guarantors. The failure of the Borrower to deliver such
opinion(s) to Bank on or before April 4, 1997 shall constitute an
Event of Default under Article VIII of this Agreement.
ARTICLE VI - AFFIRMATIVE COVENANTS OF THE BORROWER
The Borrower hereby covenants and agrees that from the date
hereof and until satisfaction in full of the Obligations, unless
the Bank shall otherwise consent in writing, the Borrower shall
do the following:
6.1 Use of Proceeds. Use the proceeds of the borrowings
hereunder only for the purposes specified in Section 2.1 of this
Agreement.
6.2 Financial Statements. Furnish to the Bank:
(a) Within ninety days after the end of each fiscal
year, financial statements of the Borrower, including a balance
sheet, statement of income, reconciliation of net worth,
statement of cash flows and such other financial statements of
the Borrower in such detail as the Bank may reasonably request.
Such financial statements shall present fairly the financial
condition of the Borrower as of the close of such year and the
results of its operations and its cash flows during such year, in
accordance with GAAP, and shall be audited and accompanied by the
opinion of an independent public accountant acceptable to the
Bank. Such opinion shall not be acceptable to the Bank if
qualified due to any limitations in scope imposed by the
Borrower. Any other qualification by the accountant shall render
the acceptability of the financial statements subject to the
Bank's approval. Such financial statements shall be accompanied
by a certificate signed by the chief financial officer of the
Borrower in which such chief financial officer calculates all
financial covenants and warrants that no Events of Default
specified in Article VIII hereof nor any events which with the
giving of notice or lapse of time, or both, would constitute an
Event of Default exist.
(b) Within forty-five days after the end of each
fiscal quarter, a balance sheet, statement of income, statement
of cash flows and such other financial statements in such detail
as the Bank may reasonably request, which shall present fairly
the financial position of the Borrower as of the end of such
quarter and the results of its operations and a statement of cash
flows during such quarter, in accordance with GAAP, certified by
the chief financial officer of the Borrower. Such financial
statements shall be accompanied by a certificate signed by the
chief financial officer of the Borrower in which such chief
financial officer calculates all financial covenants and warrants
that no Events of Default specified in Article VIII hereof nor
any events which with the giving of notice or lapse of time, or
both, would constitute an Event of Default exist.
(c) Within forty-five days after the end of each
fiscal year, a cash flow budget for the new fiscal year setting
forth budgeted monthly and cumulative cash inflows and outflows
for the year, in adequate detail and with explanatory supporting
notes and schedules itemizing cash flows on a contract-by-
contract basis as requested by the Bank.
(d) Within forty-five days after the end of each
fiscal quarter, a revised cash flow budget reconciling budgeted
and actual cash flows and explaining in sufficient detail the
causes of any variances between budgeted cash flows and actual
cash flows.
(e) When requested by Bank or, if not requested by the
Bank, within forty-five days after the end of each fiscal
quarter, a detailed aging of Accounts by customer within
department (domestic non-government, U.S. government and
international) with summary totals by age within and across
departments. Such aging shall also include the original date of
each invoice with respect to an Account, shall indicate which
Accounts are supported by a letter of credit and shall include a
summary of limitations or conditions with respect to such letters
of credit.
(f) When requested by the Bank or, if not requested by
the Bank, within forty-five days after the end of each fiscal
quarter, a schedule of contracts-in-progress, which schedule
shall include for each contract the name of the contract party,
the original and revised contract values, the original and
revised cost estimates and profit percentage estimates, the
percent complete, the projected costs to complete and the
billings in excess of costs or the costs in excess of billings
with summary totals for all categories.
(g) When filed, a copy of any and all reports filed by
the Borrower with the U.S. Securities and Exchange Commission,
including, but not limited to, Forms 10Q and 10K.
6.3 Ordinary Course of Business; Records. Conduct its
business only in the ordinary course and keep accurate and
complete books and records of its assets, liabilities and
operations consistent with sound business practices and in
accordance with GAAP.
6.4 Information for the Bank. Make available during normal
business hours for inspection by the Bank or its designated
representatives any of its books and records when reasonably
requested by the Bank to do so, and furnish the Bank any
information reasonably requested regarding its operations,
business affairs and financial condition within a reasonable time
after the Bank gives notice of its request therefor. In
particular, and without limiting the foregoing, the Borrower
shall permit, during normal business hours, representatives of
the Bank's Audit Department to make such periodic inspections of
the Borrower's books, records and assets as such representatives
deem necessary and proper.
6.5 Insurance. Carry at all times with financially sound
and reputable insurers: (a) all workers' compensation or similar
insurance as may be required under the laws of any jurisdiction;
(b) public liability insurance against claims for personal
injury, death or property damage suffered upon, in or about any
premises occupied by it or occurring as a result of the
ownership, maintenance or operation by it of any automobile,
truck or other vehicle or as a result of the use of products
manufactured, constructed or sold by it, or services rendered by
it; (c) business interruption insurance covering risk of loss as
a result of the cessation for all or any part of one year of any
substantial part of the business conducted by it; (d) hazard
insurance against such other hazards as are usually insured
against by business entities of established reputation engaged in
like businesses and similarly situated, including, without
limitation, fire (flood, if applicable) and extended coverage;
and (e) such other insurance as the Bank may from time to time
reasonably require, and pay all premiums on the policies for all
such insurance when and as they become due and take all other
actions necessary to maintain such policies in full force and
effect at all times. The insurance specified in Subsections (b),
(c) and (d) shall be maintained in such amounts (and with co-
insurance and deductibles) as such insurance is usually carried
by business entities of established reputation engaged in the
same or similar business and similarly situated. The Borrower
shall from time to time, upon request by the Bank, promptly
furnish or cause to be furnished to the Bank evidence, in form
and substance satisfactory to the Bank, of the maintenance of all
insurance required to be maintained hereby, including, without
limitation, such originals or copies as the Bank may request of
policies, certificates of insurance, riders and endorsements
relating to such insurance and proof of premium payments. The
Borrower shall cause each hazard insurance policy to provide, and
the insurer issuing each such policy to certify to the Bank, that
(a) if such insurance be proposed to be canceled or materially
changed for any reason whatsoever, such insurer will promptly
notify the Bank and such cancellation or change shall not be
effective for 30 days after receipt by the Bank of such notice,
unless the effect of such change is to extend or increase
coverage under the policy; (b) the Bank shall be named as lender
loss payee with respect to personal property and mortgagee with
respect to real property; and (c) the Bank will have the right,
at its election, to remedy any default in the payment of premiums
within 30 days of notice from the insurer of such default. The
foregoing covenants regarding insurance are in addition to, and
not intended to supersede, those covenants regarding insurance
set forth in the Security Agreement. In the event and to the
extent of any conflict between the provisions of this Agreement
and the provisions of the Security Agreement regarding the
insuring of Collateral, the provisions of the Security Agreement
with respect thereto shall govern.
6.6 Maintenance. Maintain its equipment, real property and
other properties in good condition and repair (normal wear and
tear excepted) and pay and discharge the cost of repairs thereto
or maintenance thereof.
6.7 Taxes. Pay all taxes, assessments, charges and levies
imposed upon it or on any of its property, or which it is
required to withhold and pay over, and provide evidence of
payment thereto to the Bank if the Bank so requests, except where
contested in good faith by lawful and appropriate proceedings and
where adequate reserves therefor have been set aside on its
books; provided, however, that the Borrower shall pay all such
taxes, assessments, charges and levies forthwith whenever
foreclosure on any lien which attaches or security therefor
appears imminent.
6.8 Leases. Pay all rent or other sums required by every
lease to which the Borrower is a party as the same becomes due
and payable, perform all its obligations as tenant or lessee
thereunder except where contested in good faith by lawful and
appropriate proceedings and where adequate reserves therefor have
been set aside; and keep all such leases at all times in full
force and effect during the terms thereof.
6.9 Corporate Existence; Certain Rights; Laws. Do all
things necessary to preserve and keep in full force and effect in
each jurisdiction in which it conducts business the business
existence, licenses, permits, rights, copyrights, patents,
trademarks, trade names and franchises of the Borrower and comply
with all present and future laws, ordinances, rules, regulations
judgments, orders and decrees which affect in any material way
the Borrower, its assets or the operation of its business.
6.10 Notice of Litigation or Other Proceedings. Give
immediate notice to the Bank of (i) the existence of any dispute,
(ii) the institution of any litigation, administrative proceeding
or governmental investigation involving the Borrower or (iii) the
entry of any judgment, decree or order against or involving the
Borrower, any of which might materially and adversely affect the
operation, financial condition, property or business of the
Borrower or affect the enforceability of this Agreement or any of
the other Loan Documents.
6.11 Indebtedness. Pay or cause to be paid when due (or
within applicable grace periods) all Indebtedness of the
Borrower.
6.12 Notice of Events of Default. Give immediate notice to
the Bank if the Borrower becomes aware of the occurrence of any
Event of Default, or of any fact, condition or event which with
the giving of notice or lapse of time, or both, would be an Event
of Default, or of the failure of the Borrower to observe or
perform any of the conditions or covenants to be observed or
performed by it under this Agreement or any of the other loan
Documents.
6.13 ERISA. Maintain each Plan in compliance with all
applicable requirements of ERISA and of the Code and with all
applicable rulings and regulations issued under the provisions of
ERISA and of the Code. As promptly as practicable (but in any
event not later than ten days) after the Borrower receives from
the PBGC a notice of intent to terminate any Plan or to appoint a
trustee to administer any Plan, after the Borrower has notified
the PBGC that any reportable event, as defined in Section 4043 of
ERISA, with respect to any Plan has occurred, or after the
Borrower has provided a notice of intent to terminate to each
affected party, as defined for purposes of Section 4041(a)(2) of
ERISA, with respect to any Plan, a certificate of the chief
executive officer of the Borrower shall be furnished to the Bank
setting forth the details with respect to the events resulting in
such reportable event, as the case may be, and the action which
the Borrower proposes to take with respect thereto, together with
a copy of the notice of intent to terminate or to appoint a
trustee from the PBGC, of the notice of such reportable event or
of the Borrower's notice of intent to terminate, as the case may
be.
6.14 Deposit Accounts. Use the Bank as its depository
institution unless otherwise agreed in writing by the Bank; and
notify the Bank, in writing and on a continuing basis, of all
deposit accounts and certificates of deposit (including the
numbers thereof) maintained with or purchased from other banks
and other financial institutions.
6.15 Management. Furnish to Bank within five (5) days of
any election or appointment of officers or directors, written
notice of any change in the persons who from time to time become
officers and directors of Borrower and cause William F. Mitchell,
Chairman and President and Duane Deaner, Chief Financial Officer,
to continue in their current positions with the Borrower.
6.16 Financial Covenants. Observe the financial covenants
set forth on Schedule 6.16 attached hereto and made a part
hereof.
6.17 Compliance with Environmental Laws. Comply fully with
all Environmental Laws and not use any property which it owns or
occupies to generate, treat, store, transport, transfer, dispose
of, release or otherwise handle any Hazardous Material, except in
compliance with all Environmental Laws.
6.18 Foreign Accounts. The Bank shall obtain letters of
credit acceptable to the Bank, in the Bank's sole and absolute
discretion, to support Accounts owed by Account debtors located
in countries which the Bank has rated or later rates as having a
Country Risk Rate of "3" or worse.
6.19 Further Actions. Cooperate and join with the Bank, at
its own expense, in taking all such further actions as the Bank,
in its sole judgment, shall deem necessary to effectuate the
provisions of the Loan Documents and to perfect or continue the
perfected status of all Encumbrances granted to the Bank pursuant
to the Loan Documents, including, without limitation, the
execution, delivery and filing of financing statements,
amendments thereto and continuation statements, the delivery of
chattel paper, documents or instruments to the Bank, and the
notation of Encumbrances in favor of the Bank on certificates of
title.
ARTICLE VII - NEGATIVE COVENANTS
The Borrower hereby covenants and agrees that from the
Closing Date until satisfaction in full of the Obligations, it
will not do any one or more of the following without first
obtaining the written consent of the Bank:
7.1 Fundamental Corporate Changes.
(a) change its name, enter into or effect any merger,
consolidation, share exchange, division, conversion,
reclassification, recapitalization, reorganization or other
transaction of like effect, or dissolve;
(b) sell, transfer, lease or otherwise dispose of all
or (except in the ordinary course of business) any material part
of its assets or any significant product line or process; or
(c) have any Subsidiary.
7.2 Indebtedness. Incur, create, assume or have any
Indebtedness except:
(a) the Loans;
(b) the Letters of Credit;
(c) the Chase Letters of Credit listed on Schedule 7.2
hereof (which letters of credit, upon their expiration, shall not
be renewed);
(d) the Subordinated Debt; and
(e) not more than $100,000 of other Indebtedness.
7.3 Encumbrances. Create or allow any Encumbrances to be
on or otherwise affect any of its property or assets except:
(a) encumbrances in favor of the Bank;
(b) encumbrances for taxes, assessments and other
governmental charges incurred in the ordinary course of business
which are not yet due and payable;
(c) pledges or deposits made in the ordinary course of
business to secure payment of workmen's compensation or to
participate in any fund in connection with workmen's
compensation, unemployment insurance or other social security
obligations;
(d) good faith pledges or deposits made in the
ordinary course of business to secure performance of tenders,
contracts (other than for the repayment of Indebtedness) or
leases or to secure statutory obligations or surety, appeal,
indemnity, performance or other similar bonds required in the
ordinary course of business;
(e) liens of mechanics, materialmen, warehousemen,
carriers or other similar liens, securing obligations incurred in
the ordinary course of business that are not yet due and payable;
(f) encumbrances securing Indebtedness permitted under
Section 7.2(c) and (e), provided that (i) no other covenants of
this Agreement are thereby violated and (ii) no assets other than
the assets so acquired secure such Indebtedness;
(g) encumbrances, if any, otherwise expressly
permitted by the Security Agreement or the Mortgage; and
(h) Encumbrances disclosed in the Financial
Statements.
7.4 Guaranties. Directly or indirectly make any Guaranty.
7.5 Sales and Lease-Backs. Sell, transfer or otherwise
dispose of any property, real or personal, now owned or hereafter
acquired, with the intention of directly or indirectly taking
back a lease on such property.
7.6 Loans, Investments. Purchase, invest in, or make any
loan in the nature of an investment in the stocks, bonds, notes
or other securities or evidence of Indebtedness of any person,
except for (i) short-term obligations of the Treasury of the
United States of America; (ii) certificates of deposit issued by
banks with shareholders' equity of at least $100,000,000;
(iii) repurchase agreements not exceeding 29 days in duration
issued by banks with shareholders' equity of at least
$100,000,000; or (iv) notes and other instruments generally known
as "commercial paper" which arise out of current transactions,
which have maturities at the time of issuance thereof not
exceeding nine months and which have, at the time of such
purchase, investment or other acquisition, the highest credit
rating of Standard & Poor's Corporation or Moody's Investors
Service, Inc, or make any loan or advance to or for the benefit
of any person, except for ordinary course advances to employees
for business travel and other expenses.
7.7 Change in Business. Discontinue any substantial part,
or change the nature of, the business of the Borrower, or enter
into any new business unrelated to the present business conducted
by the Borrower.
7.8 Sale or Discount of Receivables. Sell any notes
receivable or accounts receivable, with or without recourse.
7.9 Prepayment of Indebtedness. Make any voluntary
prepayments of Indebtedness other than the Loans.
7.10 ERISA.
(a) Terminate any Plan maintained by the Borrower to
which Section 4021 of ERISA applies;
(b) Allow the value of the benefits guaranteed under
Title IV of ERISA to exceed the value of assets allocable to such
benefits;
(c) Incur a withdrawal liability within the meaning of
Section 4201 of ERISA.
7.11 Restricted Payments.
(a) Declare or pay any dividend, or make any
distributions of cash or property, to holders of any shares of
its capital stock, or, directly or indirectly, redeem or
otherwise acquire any such shares or any option, warrant or right
to acquire any such shares; provided, however, that absent an
Event of Default hereunder or an event which with the giving of
notice or lapse of time, or both, would constitute an Event of
Default hereunder, Borrower may pay dividends not to exceed
$68,750 per fiscal quarter in accordance with the terms of that
certain Preferred Stock Purchase Agreement.
(b) Permit payment, whether in cash or otherwise, of
any amount on account of the Subordinated Debt, except payment of
interest (absent an Event of Default hereunder or an event which
with the giving of notice or lapse of time, or both, would
constitute an Event of Default hereunder) in accordance with the
terms of the agreements between the Borrower and the holders of
the Subordinated Debt.
7.12 Compliance with Federal Reserve Board Regulations.
(i) Use any of the proceeds of the Loans, directly or indirectly,
for the purposes of purchasing or carrying any "margin security"
within the meaning of Regulations G or U of the Board of
Governors of the Federal Reserve System (12 C.F.R. 207, 221),
(ii) use any of the proceeds of the Loans, directly or
indirectly, for the purpose of purchasing, carrying or trading in
any securities under such circumstances as to involve the
Borrower in a violation of Regulation X of such Board
(12 C.F.R. 224), or (iii) take or permit to be taken any other
action which would result in the Loans or the consummation of any
of the other transactions contemplated hereby being violative of
such regulations or any other regulation of such Board.
7.13 Change in Ownership. Allow William Mitchell and Pete
Stephens, together, to own, directly or indirectly, less than
thirty percent (30%) of the outstanding shares of voting common
stock of the Borrower.
ARTICLE VIII - EVENTS OF DEFAULT
An event of default ("Event of Default") under this
Agreement shall be deemed to exist if any one or more of the
following events occurs and is continuing, whatever the reason
therefor:
8.1 Borrower's Failure to Pay. The Borrower fails to pay
any amount of principal, interest, fees or other sums as and when
due under this Agreement or any of the other Loan Documents, or
any other Obligations, whether upon stated maturity,
acceleration, or otherwise.
8.2 Breach of Covenants or Conditions. The Borrower
(i) fails to perform or observe any term, covenant, agreement or
condition set forth in Section 6.16 or Article VII of this
Agreement, or (ii) fails to perform or observe any other term,
covenant, agreement or condition set forth in this Agreement or
any of the other Loan Documents or is in violation of or non-
compliance with any provision of this Agreement (other than those
set forth in Section 6.16 and Article VII) or any of the Loan
Documents, and, with respect only to clause (ii) above, has not
remedied and fully cured such non-performance, non-observance,
violation of or non-compliance within fifteen (15) days after the
Bank has given written notice thereof to the Borrower; provided,
however, that during such fifteen (15) day period the Bank's
obligations to make further Loans to the Borrower shall be
suspended.
8.3 Defaults in Other Agreements. The Borrower fails to
perform or observe any term, covenant, agreement or condition
contained in, or there shall occur any default under or as
defined in, any other agreement applicable to the Borrower or by
which the Borrower is bound involving a material liability of the
Borrower which shall not be remedied within the period of time
(if any) within which such other agreement permits such default
to be remedied, unless such default is waived by the other party
thereto or excused as a matter of law.
8.4 Agreements Invalid. The validity, binding nature of,
or enforceability of any material term or provision of any of the
Loan Documents is disputed by, on behalf of, or in the right or
name of the Borrower or any material term or provision of any
such Loan Document is found or declared to be invalid, avoidable,
or non-enforceable by any court of competent jurisdiction.
8.5 False Warranties; Breach of Representations. Any
warranty or representation made by the Borrower in this Agreement
or any other Loan Document or in any certificate or other writing
delivered under or pursuant to this Agreement or any other Loan
Document, or in connection with any provision of this Agreement
or related to the transactions contemplated hereby shall prove to
have been false or incorrect or breached in any material respect
on the date as of which made.
8.6 Judgments. A final judgment or judgments is entered,
or an order or orders of any judicial authority or governmental
entity is issued against the Borrower (other than judgments
disclosed on Schedule A to the Security Agreement), which is
uninsured (such judgment(s) and order(s) hereinafter collectively
referred to as "Judgment") (i) in the United States, the United
Kingdom, Canada, or any other jurisdiction in which the common
law applies for payment of money, which Judgment, in the
aggregate, exceeds One Hundred Thousand Dollars ($100,000.00)
outstanding at any one time; or (ii) in any other jurisdiction,
for payment of money, which judgment, in the aggregate, exceeds
Five Hundred Thousand Dollars ($500,000) outstanding at any one
time or (iii) for injunctive or declaratory relief which would
have a material adverse effect on the ability of the Borrower to
conduct its business, and such Judgment is not discharged or
execution thereon or enforcement thereof stayed pending appeal,
within thirty days after entry or issuance thereof, or, in the
event of such a stay, such Judgment is not discharged within
thirty days after such stay expires.
8.7 Bankruptcy or Insolvency of the Borrower.
(a) The Borrower or any Guarantor becomes insolvent,
or generally fails to pay, or is generally unable to pay, or
admits in writing its inability to pay, its debts as they become
due or applies for, consents to, or acquiesces in, the
appointment of a trustee, receiver or other custodian for the
Borrower or a substantial part of its property, or makes a
general assignment for the benefit of creditors.
(b) The Borrower or any Guarantor commences any
bankruptcy, reorganization, debt arrangement, or other case or
proceeding under any state or federal bankruptcy or insolvency
law, or any dissolution or liquidation proceeding.
(c) Any bankruptcy, reorganization, debt arrangement,
or other case or proceeding under any state or federal bankruptcy
or insolvency law, or any dissolution or liquidation proceeding,
is involuntarily commenced against or in respect of the Borrower
or any Guarantor or an order for relief is entered in any such
proceeding, which is not dismissed within sixty days.
004 A trustee, receiver, or other custodian is
appointed for the Borrower or any Guarantor or a substantial part
of the Borrower's or any Guarantor's property.
ARTICLE IX - REMEDIES
9.1 Further Advances; Acceleration; Setoff.
(a) Upon the occurrence of any one or more Events of
Default, the Bank may, in its sole discretion, refuse to make any
further advances or Loans to the Borrower.
(b) Automatically upon the occurrence of any Event of
Default described in Section 8.7 of this Agreement, and in the
sole discretion of the Bank upon the occurrence of any other
Event of Default, the unpaid principal balance of all Loans, all
interest and fees accrued and unpaid thereon, and all other
amounts and Obligations payable by the Borrower under this
Agreement and the other Loan Documents shall immediately become
due and payable in full, all without protest, presentment,
demand, or further notice of any kind to the Borrower, all of
which are expressly waived by the Borrower.
(c) If any of the Obligations shall be due and payable
or any one or more Events of Default shall have occurred, the
Bank shall have the right, in addition to all other rights and
remedies available to it, without notice to the Borrower, to
apply toward and set-off against and apply to the then unpaid
balance of the Note and the other Obligations any items or funds
held by the Bank, any and all deposits (whether general or
special, time or demand, matured or unmatured, fixed or
contingent, liquidated or unliquidated) now or hereafter
maintained by the Borrower for its own account with the Bank, and
any other indebtedness at any time held or owing by the Bank to
or for the credit or the account of the Borrower. For such
purpose the Bank shall have, and the Borrower hereby grants to
the Bank, a first lien on all such deposits. The Bank is hereby
authorized to charge any such account or indebtedness for any
amounts due to the Bank. Such right of set-off shall exist
whether or not the Bank shall have made any demand under this
Agreement, the Note or any other Loan Document and whether or not
the Note and the other Obligations are matured or unmatured. The
Borrower hereby confirms the Bank's lien on such accounts and
right of set-off, and nothing in this Agreement shall be deemed
any waiver or prohibition of such lien and right of set-off.
9.2 Further Remedies; Confession of Judgment.
(a) Upon the occurrence of any one or more Events of
Default, the Bank may proceed to protect and enforce its rights
under this Agreement and the other Loan Documents by exercising
such remedies as are available to the Bank in respect thereof
under applicable law, either by suit in equity or by action at
law, or both, whether for specific performance of any provision
contained in this Agreement or any of the other Loan Documents or
in aid of the exercise of any power granted in this Agreement or
any of the other Loan Documents.
(b) THE FOLLOWING PARAGRAPH SETS FORTH A POWER OF
AUTHORITY FOR ANY ATTORNEY TO CONFESS JUDGMENT AGAINST BORROWER.
IN GRANTING THIS WARRANT OF ATTORNEY TO CONFESS JUDGMENT AGAINST
BORROWER, THE BORROWER, FOLLOWING CONSULTATION WITH (OR DECISION
NOT TO CONSULT) SEPARATE COUNSEL FOR BORROWER AND WITH KNOWLEDGE
OF THE LEGAL EFFECT HEREOF, HEREBY KNOWINGLY, INTENTIONALLY,
VOLUNTARILY, INTELLIGENTLY AND UNCONDITIONALLY WAIVES ANY AND ALL
RIGHTS THE BORROWER HAS OR MAY HAVE TO PRIOR NOTICE AND AN
OPPORTUNITY FOR HEARING UNDER THE RESPECTIVE CONSTITUTIONS AND
LAWS OF THE UNITED STATES OF AMERICA, COMMONWEALTH OF
PENNSYLVANIA, OR ELSEWHERE INCLUDING, WITHOUT LIMITATION, A
HEARING PRIOR TO GARNISHMENT AND ATTACHMENT OF THE BORROWER'S
BANK ACCOUNT AND OTHER ASSETS. BORROWER ACKNOWLEDGES AND
UNDERSTANDS THAT BY ENTERING INTO THIS AGREEMENT CONTAINING A
CONFESSION OF JUDGMENT CLAUSE THAT BORROWER IS VOLUNTARILY,
INTELLIGENTLY AND KNOWINGLY GIVING UP ANY AND ALL RIGHTS,
INCLUDING CONSTITUTIONAL RIGHTS, THAT BORROWER HAS OR MAY HAVE TO
NOTICE AND A HEARING BEFORE JUDGMENT CAN BE ENTERED AGAINST
BORROWER AND BEFORE THE BORROWER'S ASSETS, INCLUDING, WITHOUT
LIMITATION, ITS BANK ACCOUNTS, MAY BE GARNISHED, LEVIED, EXECUTED
UPON AND/OR ATTACHED. BORROWER UNDERSTANDS THAT ANY SUCH
GARNISHMENT, LEVY, EXECUTION AND/OR ATTACHMENT SHALL RENDER THE
PROPERTY GARNISHED, LEVIED, EXECUTED UPON OR ATTACHED IMMEDIATELY
UNAVAILABLE TO BORROWER. IT IS SPECIFICALLY ACKNOWLEDGED BY
BORROWER THAT THE BANK HAS RELIED ON THIS WARRANT OF ATTORNEY AND
THE RIGHTS WAIVED BY BORROWER HEREIN IN ENTERING INTO THIS
AGREEMENT AND AS AN INDUCEMENT TO EXTEND CREDIT TO THE BORROWER.
Upon the occurrence of an Event of Default hereunder or
under any other Loan Document, Borrower hereby jointly and
severally authorizes and empowers any attorney of any court of
record or the prothonotary or clerk of any county in the
Commonwealth of Pennsylvania, or in any jurisdiction where
permitted by law or the clerk of any United States District
Court, to appear for Borrower in any and all actions which may be
bought hereunder and enter and confess judgment against the
Borrower or any of them in favor of the Bank for such sums as are
due or may become due hereunder or under any other Loan
Documents, together with costs of suit and actual collection
costs including, without limitation, reasonable attorneys' fees
equal to 1% of the Obligations then due and owing but in no event
less than $5,000.00, with or without declaration, without prior
notice, without stay of execution and with release of all
procedural errors and the right to issue executions forthwith.
To the extent permitted by law, Borrower waives the right of
inquisition on any real estate levied on, voluntarily condemns
the same, authorizes the prothonotary or clerk to enter upon the
writ of execution this voluntary condemnation and agrees that
such real estate may be sold on a writ of execution; and also
waives any relief from any appraisement, stay or exemption law of
any state now in force or hereafter enacted. Borrower further
waives the right to any notice and hearing prior to the
execution, levy, attachment or other type of enforcement of any
judgment obtained hereunder, including, without limitation, the
right to be notified and heard prior to the garnishment, levy,
execution upon and attachment of Borrower's bank accounts and
other property. If a copy of this Agreement verified by
affidavit of any officer of the Bank shall have been filed in
such action, it shall not be necessary to file the original
thereof as a warrant of attorney, any practice or usage to the
contrary notwithstanding. The authority herein granted to
confess judgment shall not be exhausted by any single exercise
thereof, but shall continue and may be exercised from time to
time as often as the Bank shall find it necessary and desirable
and at all times until full payment of all amounts due hereunder
and under any other Loan Documents. The Bank may confess one or
more judgments in the same or different jurisdictions for all or
any part of the Obligations arising hereunder or under any other
Loan Documents to which Borrower is a party, without regard to
whether judgment has theretofore been confessed on more than one
occasion for the same Obligations. In the event that any
judgment confessed against the Borrower is stricken or opened
upon application by or on behalf of Borrower or any obligor for
any reason, the Bank is hereby authorized and empowered to again
appear for and confess judgment against Borrower for any part or
all of the Obligations owing under this Agreement and/or for any
other liabilities, as herein provided.
ARTICLE X - MISCELLANEOUS
10.1 Remedies Cumulative; No Waiver. The rights, powers and
remedies of the Bank provided in this Agreement and the other
Loan Documents are cumulative and not exclusive of any right,
power or remedy provided by law or equity, and no failure or
delay on the part of the Bank in the exercise of any right,
power, or remedy shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, power, or remedy
preclude other or further exercise thereof, or the exercise of
any other right, power or remedy.
10.2 Notices. Every notice and communication under this
Agreement or any of the other Loan Documents shall be in writing
and shall be given by either (i) hand-delivery, (ii) first class
mail (postage prepaid), (iii) reliable overnight commercial
courier (charges prepaid), or (iv) telecopy or other means of
electronic transmission, if confirmed promptly by any of the
methods specified in clauses (i), (ii) and (iii) of this
sentence, to the following addresses:
If to the Borrower:
Environmental Tectonics Corporation
County Line Industrial Park
Southampton, Pennsylvania 18966-3877
Attn: William F. Mitchell, President
Telecopy No: (215) 357-4000
With a copy to:
Jeffrey P. Waldron, Esquire
Stevens & Lee, P.C.
One Glenhardie Corporate Center
Suite 202
1275 Drummers Lane
P.O. Box 236
Wayne, Pennsylvania 19087-0236
Telecopy No.: (610) 687-1384
If to the Bank:
First Union National Bank
Portfolio Management
Witherspoon Building, PA 1310
Broad & Walnut Streets
Philadelphia, Pennsylvania 19109
Attn: Jack Albaugh
Telecopy No.:(215) 985-3143 or 985-3149
With a copy to:
Duane, Morris & Heckscher
One Liberty Place
Philadelphia, Pennsylvania 19103
Attn: James L. Allison, Esquire
Telecopy No.: (215) 979-1020
Notice given by telecopy or other means of electronic
transmission shall be deemed to have been given and received when
sent. Notice by overnight courier shall be deemed to have been
given and received on the date scheduled for delivery. Notice by
mail shall be deemed to have been given and received three (3)
calendar days after the date first deposited in the United States
Mail. Notice by hand delivery shall be deemed to have been given
and received upon delivery.
A party may change its address by giving written notice to
the other party as specified herein.
10.3 Costs, Expenses and Attorneys' Fees. Whether or not
the transactions contemplated by this Agreement and the other
Loan Documents are fully consummated, the Borrower shall promptly
pay (or reimburse, as the Bank may elect) all costs and expenses
which the Bank has incurred or may hereafter incur in connection
with the negotiation, preparation, reproduction, interpretation
and enforcement of this Agreement and the other Loan Documents,
the collection of all amounts due hereunder and thereunder, and
any amendment, modification, consent or waiver which may be
hereafter requested by the Borrower or otherwise required. Such
costs and expenses shall include, without limitation, the fees
and disbursements of counsel to the Bank, the costs of appraisal
fees, searches of public records, costs of filing and recording
documents with public offices, and similar costs and expenses
incurred by the Bank. Upon the occurrence of an Event of
Default, such costs shall also include the fees of any
accountants, consultants or other professionals retained by the
Bank. The Borrower's reimbursement obligations under this
Section shall survive any termination of this Agreement.
10.4 Survival of Covenants. This Agreement and all
covenants, agreements, representations and warranties made herein
and in any certificates delivered pursuant hereto shall survive
the making of the Loans and the execution and delivery of the
Note and, subject to the provisions of 10.15 hereof, shall
continue in full force and effect until all of the Obligations
have been fully paid, performed, satisfied and discharged.
10.5 Counterparts; Effectiveness. This Agreement may be
executed in any number of counterparts and by the different
parties on separate counterparts. Each such counterpart shall be
deemed to be an original, but all such counterparts shall
together constitute one and the same Agreement. This Agreement
shall be deemed to have been executed and delivered when the Bank
has received counterparts hereof executed by all parties listed
on the signature page(s) hereto.
10.6 Headings. The headings of sections have been included
herein for convenience only and shall not be considered in
interpreting this Agreement.
10.7 Payment Due On A Day Other Than A Business Day. If any
payment due or action to be taken under this Agreement or any
Loan Document falls due or is required to be taken on a day which
is not a Business Day, such payment or action shall be made or
taken on the next succeeding Business Day and such extended time
shall be included in the computation of interest.
10.8 Arbitration. Upon demand of any party hereto, whether
made before or after institution of any judicial proceeding, any
dispute, claim or controversy arising out of, connected with or
relating to this Agreement and other Loan Documents ("Disputes")
between or among parties to this Agreement shall be resolved by
binding arbitration as provided herein. Institution of a
judicial proceeding by a party does not waive the right of that
party to demand arbitration hereunder. Disputes may include,
without limitation, tort claims, counterclaims, disputes as to
whether a matter is subject to arbitration, claims brought as
class actions, claims arising from Loan Documents executed in the
future, or claims arising out of or connected with the
transaction reflected by this Agreement.
Arbitration shall be conducted under and governed by the
Commercial Financial Disputes Arbitration Rules (the "Arbitration
Rules") of the American Arbitration Association (the "AAA") and
Title 9 of the U.S. Code. All arbitration hearings shall be
conducted in Philadelphia, Pennsylvania. The expedited
procedures set forth in Rule 51 et seq. of the Arbitration Rules
shall be applicable to claims of less than $1,000,000.00. All
applicable statutes of limitation shall apply to any Dispute. A
judgment upon the award may be entered in any court having
jurisdiction. The panel from which all arbitrators are selected
shall be comprised of licensed attorneys. The single arbitrator
selected for expedited procedure shall be a retired judge from
the highest court of general jurisdiction, state or federal, of
the state where the hearing will be conducted or if such person
is not available to serve, the single arbitrator may be a
licensed attorney. Notwithstanding the foregoing, this
arbitration provision does not apply to disputes under or related
to swap agreements.
10.9 Preservation and Limitation of Remedies.
Notwithstanding the preceding binding arbitration provisions,
Bank and Borrower agree to preserve, without diminution, certain
remedies that any party hereto may employ or exercise freely,
independently or in connection with an arbitration proceeding or
after an arbitration action is brought. Bank and Borrower shall
have the right to proceed in any court of proper jurisdiction or
by self-help to exercise or prosecute the following remedies, as
applicable: (i) all rights to foreclose against any real or
personal property or other security by exercising a power of sale
granted under Loan Documents or under applicable law or by
judicial foreclosure and sale, including a proceeding to confirm
the sale; (ii) all rights of self-help including peaceful
occupation of real property and collection of rents, set-off, and
peaceful possession of personal property; (iii) obtaining
provisional or ancillary remedies including injunctive relief,
sequestration, garnishment, attachment, appointment of receiver
and filing an involuntary bankruptcy proceeding; and (iv) when
applicable, a judgment by confession of judgment. Preservation
of these remedies does not limit the power of an arbitrator to
grant similar remedies that may be requested by a party in a
Dispute.
Borrower and Bank agree that they shall not have a remedy of
punitive or exemplary damages against the other in any Dispute
and hereby waive any right or claim to punitive or exemplary
damages they have now or which may arise in the future in
connection with any Dispute whether the Dispute is resolved by
arbitration or judicially.
10.10 Governing Law. This Agreement shall be construed in
accordance with and governed by the internal laws of the
Commonwealth of Pennsylvania.
10.11 Integration. This Agreement and the other Loan
Documents constitute the sole agreement of the parties with
respect to the subject matter hereof and thereof and supersede
all oral negotiations and prior writings with respect to the
subject matter hereof and thereof.
10.12 Amendment and Waiver. No amendment of this
Agreement, and no waiver of any one or more of the provisions
hereof shall be effective unless set forth in writing and signed
by the parties hereto.
10.13 Successors and Assigns.
(a) Generally. This Agreement (i) shall be binding
upon the Borrower and the Bank and their respective successors
and assigns, and (ii) shall inure to the benefit of the Borrower
and the Bank and their respective successors and assigns,
provided, however, that the Borrower may not assign its rights
hereunder or any interest herein without the prior written
consent of the Bank, and any such assignment or attempted
assignment by the Borrower shall be void and of no effect with
respect to the Bank.
(b) Participations. The Bank may from time to time
sell or otherwise grant participations in the Loans and the Note,
provided that the Bank remains sole agent with respect to the
Loans and the Note, and the holder of any such participation, if
the participation agreement so provides, (i) shall, with respect
to its participation, be entitled to all of the rights of the
Bank and (ii) may exercise any and all rights of setoff or
banker's lien with respect thereto, in each case as fully as
though the Borrower were directly indebted to the holder of such
participation in the amount of such participation. The Bank may
disclose to prospective participants such information regarding
the Borrower's affairs as the Bank possesses. The Bank shall
give notice to the Borrower of the grant of such participations;
however, the failure to give such notice shall not affect any of
the Bank's rights hereunder.
10.14 Severability of Provisions. Any provision in this
Agreement that is held to be inoperative, unenforceable,
voidable, or invalid in any jurisdiction shall, as to that
jurisdiction, be ineffective, unenforceable, void or invalid
without affecting the remaining provisions, and to this end the
provisions of this Agreement are declared to be severable.
10.15 Consent to Jurisdiction and Service of Process. The
Borrower irrevocably appoints each and every officer of the
Borrower as its attorneys upon whom may be served, by regular or
certified mail at the address set forth in Section 10.2 hereof,
any notice, process or pleading in any action or proceeding
against it arising out of or in connection with this Agreement or
any of the other Loan Documents; and the Borrower hereby
(i) consents that any action or proceeding against it be
commenced and maintained in any court within the Commonwealth of
Pennsylvania or in the United States District Court for the
Eastern District of Pennsylvania by service of process on any
such officer; (ii) agrees that the courts of the Commonwealth of
Pennsylvania and the United States District Court for the Eastern
District of Pennsylvania shall have jurisdiction with respect to
the subject matter hereof and the person of the Borrower and the
Collateral, and (iii) waives any objection that such Borrower may
now or hereafter have as to the venue of any such suit, action or
proceeding brought in such a court or that such court is an
inconvenient forum. Notwithstanding the foregoing, the Bank, in
its absolute discretion may also initiate proceedings in the
courts of any other jurisdiction in which the Borrower may be
found or in which any of its properties or the Collateral may be
located.
10.16 Indemnification.
(a) If, after receipt of any payment of all or any
part of the Obligations, the Bank is compelled to surrender such
payment to any Person or entity for any reason (including,
without limitation, a determination that such payment is void or
voidable as a preference or fraudulent conveyance, an
impermissible setoff, or a diversion of trust funds), then this
Agreement and the other Loan Documents shall continue in full
force and effect, and the Borrower shall be liable for, and shall
indemnify, defend and hold harmless the Bank with respect to the
full amount so surrendered.
(b) The Borrower shall indemnify, defend and hold
harmless the Bank with respect to any and all claims, expenses,
demands, losses, costs, fines or liabilities of any kind,
including reasonable attorneys' fees and costs, arising from or
in any way related to (i) acts or conduct of the Borrower under,
pursuant to or related to this Agreement and the other Loan
Documents, (ii) Borrower's breach or violation of any
representation, warranty, covenant or undertaking contained in
this Agreement or the other Loan Documents, and (iii) Borrower's
failure to comply with any or all laws, statutes, ordinances,
governmental rules, regulations or standards, whether federal,
state, or local, or court or administrative orders or decrees,
including without limitation those resulting from any Hazardous
Materials or dangerous environmental condition within, on, from,
related to or affecting any real property owned or occupied by
the Borrower, unless resulting from the acts or conduct of the
Bank constituting gross negligence or willful misconduct.
(c) The provisions of this section shall survive the
termination of this Agreement and the other Loan Documents and
shall be and remain effective notwithstanding the payment of the
Obligations, the cancellation of the Note, the release of any
Encumbrance securing the Obligations or any other action which
the Bank may have taken in reliance upon its receipt of such
payment. Any cancellation of the Note, release of any
Encumbrance or other such action shall be deemed to have been
conditioned upon any payment of the Obligations having become
final and irrevocable.
IN WITNESS WHEREOF, the undersigned have caused this
Agreement to be executed by their duly authorized officers on the
date first above written.
ENVIRONMENTAL TECTONICS CORPORATION
By:/s/ Duane Deaner
Name: Duane Deaner
Title: Chief Financial Officer
FIRST UNION NATIONAL BANK
By:/s/ Walter Stockhecker
Name: Walter Stockhecker
Title: Senior Vice President
<PAGE>
Schedule 6.16
FINANCIAL COVENANTS
This Schedule is a part of the Revolving Credit Agreement
dated March 27, 1997 between First Union National Bank and
Environmental Tectonics Corporation.
A. Current Ratio -- The Borrower shall have at the end of
each fiscal quarter a Current Ratio of not less than 1.50
to 1.00.
B. Leverage Ratio -- The Borrower shall have at the end of
each fiscal quarter a Leverage Ratio of not more than:
(i) 1.25 to 1.00 for the fiscal quarters ending
May 31, 1997, August 31, 1997 and November 30, 1997; and
(ii) 1.00 to 1.00 for the quarter ending February 27,
1998 and subsequent quarters.
C. Funds Flow Coverage Ratio -- The Borrower shall have at
the end of each fiscal quarter a Funds Flow Coverage Ratio of not
less than 1.10 to 1.00.
"Current Assets" shall mean, at any time, all assets which,
in accordance with GAAP, should be classified as current assets
of the Borrower.
"Current Liabilities" shall mean, at any time, all
liabilities which, in accordance with GAAP, should be classified
as current liabilities of the Borrower, plus, if the Line of
Credit Loans do not constitute current liabilities in accordance
with GAAP, the Line of Credit Loans, plus the face amount of all
issued Letters of Credit.
"Current Ratio" shall mean, at any time, the ratio of
Current Assets to Current Liabilities.
"Funds Flow Coverage Ratio" shall mean the sum of (i) Net
Income, interest expense, depreciation and amortization less
(ii) preferred dividends, unfunded capital expenditures, software
development costs and non-cash income (to the extent included in
Net Income) divided by the sum of interest expense, current
maturities of long term debt (excluding any and all Line of
Credit Loans) and capital leases (calculated in accordance with
GAAP) plus twenty percent of the average of the maximum
borrowings outstanding under the Revolving Facility Commitment
during each of the two most recent quarters. Prior to
February 27, 1998, the Funds Flow Coverage Ratio shall be
calculated by annualizing all components of the Funds Flow
Coverage Ratio. Thereafter, the Funds Flow Coverage Ratio shall
be calculated on a twelve-month rolling basis.
"Leverage Ratio" shall mean the ratio of Senior Liabilities
to Tangible Capital Funds.
"Liabilities" shall mean, at any time, all liabilities
which, in accordance with GAAP, shall be classified as
liabilities of the Borrower.
"Net Income" shall mean, for any period, the net income of
the Borrower, determined in accordance with GAAP, excluding:
(a) the proceeds of any insurance policy;
(b) any gain or loss arising from:
(1) the sale or other disposition of any assets
(other than Current Assets);
(2) any write-up of assets; or
(3) the acquisition of outstanding securities
representing Indebtedness of the Borrower;
(c) any amount representing any interest in the
undistributed earnings of any Person;
(d) any earnings, prior to the date of acquisition, of
any Person acquired in any manner;
(e) any earnings of a successor to or transferee of
the assets of the Borrower prior to becoming such successor or
transferee;
(f) any deferred credit (or amortization of a deferred
credit) arising from the acquisition of any Person; and
(g) any other item constituting an extraordinary gain
or loss under GAAP.
"Senior Liabilities" shall mean, at any time, all
Liabilities less the Subordinated Debt.
"Tangible Assets" shall mean all tangible assets of the
Borrower and shall exclude, without limitation, all goodwill,
franchises, licenses, patents, trademarks, trade names,
copyrights, service marks, and brand names, but shall not exclude
software development costs.
"Tangible Capital Funds" shall mean Tangible Assets less
Senior Liabilities.
Exhibit 10.7
DEBENTURE PURCHASE AGREEMENT
OF
SIRROM CAPITAL CORPORATION
AND
ENVIRONMENTAL TECTONICS CORPORATION
<PAGE>
TABLE OF CONTENTS
ARTICLE I - SALE AND PURCHASE OF DEBENTURES................... 1
Section 1.1 Description of Debentures................... 1
Section 1.2 Commitment; Closing Date.................... 2
Section 1.3 Processing Fee.............................. 2
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY.... 2
Section 2.1 Corporate Status............................ 2
Section 2.2 Capitalization.............................. 3
Section 2.3 Authorization............................... 4
Section 2.4 Validity and Binding Effect................. 5
Section 2.5 Other Transactions.......................... 5
Section 2.6 Litigation.................................. 5
Section 2.7 Financial Statements........................ 5
Section 2.8 SEC Reports................................. 6
Section 2.9 Absence of Changes.......................... 6
Section 2.10 No Defaults................................ 7
Section 2.11 Compliance With Law........................ 7
Section 2.12 Taxes...................................... 7
Section 2.13 Certain Transactions....................... 8
Section 2.14 Title to Property.......................... 8
Section 2.15 Intellectual Property...................... 8
Section 2.16 Accounting Matters......................... 9
Section 2.17 Distributions to Company.................. 10
Section 2.18 Prior Sales............................... 10
Section 2.19 Regulatory Compliance..................... 10
Section 2.20 1940 Act Compliance....................... 10
Section 2.21 Registration Rights....................... 10
Section 2.22 Environment............................... 11
Section 2.23 Insurance................................. 12
Section 2.24 Governmental Consents..................... 12
Section 2.25 Offering.................................. 12
Section 2.26 Manufacturing Rights...................... 12
Section 2.27 Employees................................. 12
Section 2.28 Fees/Commissions.......................... 13
Section 2.29 1940 Act Compliance....................... 13
Section 2.30 ERISA..................................... 13
Section 2.31 Disclosure................................ 14
Section 2.32 Survival.................................. 14
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PURCHASER.... 14
Section 3.1 Authorization.............................. 14
Section 3.2 Validity and Binding Effect................ 15
Section 3.3 Purchase for Investment.................... 15
Section 3.4 Survival................................... 15
ARTICLE IV - CONDITIONS PRECEDENT TO THE
OBLIGATIONS OF PURCHASER..................................... 15
Section 4.1 Representations and Warranties............. 15
Section 4.2 Officer's Certificate...................... 15
Section 4.3 Satisfactory Proceedings................... 16
Section 4.4 Legal Opinion.............................. 16
Section 4.5 The Company's Existence and Authority...... 16
Section 4.6 Delivery of Operative Documents............ 16
Section 4.7 Sale of Preferred Stock.................... 17
Section 4.8 Closing of FUNB Financing.................. 17
Section 4.9 Required Consents.......................... 17
Section 4.10 Waiver of Conditions...................... 17
ARTICLE V - COVENANTS OF COMPANY............................. 17
Section 5.1 Use of Proceeds............................ 17
Section 5.2 Use of Proceeds from Settlement............ 18
Section 5.3 Payment of Debentures...................... 18
Section 5.4 Repurchase of Debenture.................... 18
Section 5.5 Corporate Existence, Etc................... 18
Section 5.6 Maintenance, Etc........................... 19
Section 5.7 Nature of Business......................... 19
Section 5.8 Insurance.................................. 19
Section 5.9 Taxes, Claims for Labor and Materials...... 19
Section 5.10 Compliance with Laws...................... 20
Section 5.11 ERISA Matters............................. 20
Section 5.12 Books and Records; Rights of Inspection... 20
Section 5.13 Reports................................... 21
Section 5.14 Limitations on Debt and Obligations....... 22
Section 5.15 Guaranties................................ 22
Section 5.16 Limitation on Liens....................... 23
Section 5.17 Restricted Payments....................... 24
Section 5.18 Investments............................... 24
Section 5.19 Mergers, Consolidations and Sales
of Assets.......................................... 25
Section 5.20 Transactions with Affiliates.............. 26
Section 5.21 Notice.................................... 27
Section 5.22 Observer Rights........................... 27
Section 5.23 Information............................... 27
Section 5.24 Further Assurances........................ 28
Section 5.25 Optional Redemptions of Debentures........ 28
ARTICLE VI - SUBORDINATION OF DEBENTURES..................... 28
Section 6.1 Subordination.............................. 28
ARTICLE VII - EVENTS OF DEFAULT; REMEDIES.................... 28
Section 7.1 Events of Default.......................... 28
Section 7.2 Notice to Holders.......................... 30
Section 7.3 Acceleration of Maturities................. 30
ARTICLE VIII - RESTRICTIONS ON TRANSFER...................... 31
Section 8.1 Legends; Restrictions on Transfer.......... 31
Section 8.2 Notice of Intention to Transfer;
Opinions of Counsel................................ 31
ARTICLE IX - AMENDMENTS, WAIVERS AND CONSENTS................ 32
Section 9.1 Consent Required........................... 32
Section 9.2 Solicitation of Debenture Holders.......... 32
Section 9.3 Effect of Amendment or Waiver.............. 32
ARTICLE X - INTERPRETATION OF AGREEMENT; DEFINITIONS......... 32
Section 10.1 Definitions............................... 32
Section 10.2 Accounting Principles..................... 36
Section 10.3 Directly or Indirectly.................... 36
ARTICLE XI - MISCELLANEOUS................................... 36
Section 11.1 Expenses, Stamp Tax Indemnity............. 36
Section 11.2 Powers and Rights Not Waived; Remedies
Cumulative......................................... 37
Section 11.3 Notices................................... 37
Section 11.4 Successors and Assigns.................... 38
Section 11.5 Survival of Covenants and Representations. 38
Section 11.6 Severability.............................. 38
Section 11.7 Governing Law............................. 38
Section 11.8 Captions; Counterparts.................... 39
<PAGE>
DEBENTURE PURCHASE AGREEMENT
This DEBENTURE PURCHASE AGREEMENT (the "Agreement")
entered into the 27th day of March, 1997, by and between
ENVIRONMENTAL TECTONICS CORPORATION, a Pennsylvania corporation
(the "Company") and SIRROM CAPITAL CORPORATION, a Tennessee
corporation (the "Purchaser").
W I T N E S S E T H:
WHEREAS, the Company desires to obtain additional
capital for use in connection with its business through the issue
and sale of certain obligations, and Purchaser is willing to
purchase such obligations of the Company, on the terms and
conditions set forth herein.
NOW, THEREFORE, in mutual consideration of the premises
and the respective representations, warranties, covenants and
agreements contained herein, the parties agree as follows:
ARTICLE I - SALE AND PURCHASE OF DEBENTURES
Section 1.1 Description of Debentures.
(a) The Company has authorized the issue and sale
of $4,000,000 aggregate principal amount of its 12% Subordinated
Debentures due March 27, 2004 (the "Debentures"), to be dated the
date of issue, to bear interest from such date at the rate of 12%
per annum, payable quarterly by automatic debit on the first day
of each February, May, August and November in each year
(commencing May 1, 1997) and at maturity and to bear interest on
overdue principal (including any overdue required prepayment of
principal or optional prepayment of principal pursuant to
Section 5.24) and premium, if any, and (to the extent legally
enforceable) on any overdue installment of interest at the rate
of 13% per annum after maturity, whether by acceleration or
otherwise, until paid, to be expressed to mature on March 27,
2004, and to be substantially in the form attached hereto as
Exhibit A-1. Interest on the Debentures shall be computed on the
basis of a 360-day year of twelve 30-day months. The Debentures
are not subject to prepayment or redemption at the option of the
Company prior to their expressed maturity dates except on the
terms and conditions and in the amounts and with the premium, if
any, set forth in Section 5.24 of this Agreement. The term
"Debentures" as used herein shall include each Debenture
delivered pursuant to this Agreement. The terms which are
capitalized herein shall have the meanings set forth in Section
10 hereof unless the context shall otherwise require.
(b) Simultaneously with the purchase and sale of
the Debentures, the Company shall grant, issue, and deliver to
Purchaser its Stock Purchase Warrant, dated the date hereof and
substantially in the form attached hereto as Exhibit A-2 (the
"Warrant").
Section 1.2 Commitment; Closing Date.
Subject to the terms and conditions hereof and on the
basis of the representations and warranties hereinafter set
forth, the Company agrees to issue and sell to Purchaser, and
Purchaser agrees to purchase from the Company, Debentures in the
aggregated principal amount of $4,000,000 at a price of 100% of
the principal amount thereof.
Delivery of the Debentures will be made at the offices
of Sherrard & Roe, PLC, 424 Church Street, Suite 2000, Nashville,
Tennessee 37219, against payment therefor by federal funds wire
transfer in immediately available funds and to the accounts and
in the amounts in accordance with the Company's wire instructions
set forth on Exhibit B hereto, at 10:00 A.M., Nashville time, on
March 27, 1997, or such later date as the Company and Purchaser
shall agree (the "Closing Date"). The Debentures delivered to
Purchaser on the Closing Date will be delivered to Purchaser in
the form of a single registered Debenture for the full amount of
such purchase (unless different denominations are specified by
Purchaser), registered in Purchaser's name or in the name of such
nominee as Purchaser may specify and, with appropriate
insertions, in the form attached hereto as Exhibit A, all as
Purchaser may specify at least 24 hours prior to the date fixed
for delivery.
Section 1.3 Processing Fee.
The Company agrees to pay to Purchaser on or before the
Closing Date a processing fee in an amount equal to $80,000.
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchaser
as follows:
Section 2.1 Corporate Status.
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has the corporate power to own
and operate its properties, to carry on its business as now
conducted and to enter into and to perform its obligations under
this Agreement, the Debentures, the Preferred Stock Purchase
Agreement, the Warrant, the Registration Rights Agreement, the
Subordination Agreement between First Union National Bank, the
Company, and Purchaser, and any other document executed and
delivered by Purchaser in connection herewith or therewith
(collectively, the "Operative Documents"). The Company is
qualified to do business and is in good standing in each state or
other jurisdiction in which such qualification is necessary under
applicable provisions of law, except where the failure to so
qualify would not have a material adverse effect on the financial
condition or results of operations of the Company. The states or
other jurisdictions in which the Company is so qualified are set
forth on Schedule 2.1(a) hereto. A certified charter of the
Company and a good standing certificate for each state in which
it is qualified to do business are attached to Schedule 2.1(a).
(b) Schedule 2.1(b) sets forth a complete list of
each corporation, partnership, joint venture, limited liability
company or other business organization in which the Company owns,
directly or indirectly, any capital stock or other equity
interest (the "Subsidiary" or, collectively, the "Subsidiaries"),
or with respect to which the Company or any Subsidiary, alone or
in combination with others, is in a control position, which list
shows the jurisdiction of incorporation or other organization and
the percentage of stock or other equity interest of each
Subsidiary owned by the Company. Each Subsidiary is duly
organized, validly existing and in good standing under the laws
of the jurisdiction of incorporation or other organization as
indicated on Schedule 2.1(b), each has all requisite power and
authority and holds all material licenses, permits and other
required authorizations from government authorities necessary to
own its properties and assets and to conduct its business as it
is now being conducted, and is qualified to do business as a
foreign corporation (or business organization) and is in good
standing in every jurisdiction in which such qualification is
necessary under applicable provisions of law, except where the
failure to so qualify would not have a material adverse effect on
the financial condition or results of operations of the Company.
All of the outstanding shares of capital stock, or other equity
interest, of each Subsidiary owned, directly or indirectly, by
the Company have been validly issued, are fully paid and
nonassessable, and are owned by the Company free and clear of all
liens, charges, security interests or encumbrances. A certified
charter for each Subsidiary and good standing certificates for
each of the states in which each Subsidiary is qualified to do
business are attached to Schedule 2.1(b).
(c) Schedule 2.1(c) sets forth a complete list of
"affiliates," as that term is defined in Rule 405 of Regulation C
adopted under the Securities Act of 1933, as amended (the
"Securities Act"), with a brief statement describing the basis of
each affiliation.
Section 2.2 Capitalization.
(a) The authorized capital stock of the Company
consists of (i) 10,000,000 shares of common stock, par value
$.10 per share (the "Common Stock"), of which 2,962,784 shares
are issued and outstanding, and (ii) 1,000,000 shares of
undesignated preferred stock, with rights and preferences fixed
by the Board of Directors in accordance with the corporate laws
of the Commonwealth of Pennsylvania and the Company's Articles
of Incorporation, none of which are outstanding. All shares of
Common Stock outstanding have been validly issued and are fully
paid and nonassessable. There are no statutory or contractual
pre-emptive rights, rights of first refusal, antidilution rights
or any similar rights held by any party with respect to the
issuance of the Debentures. The offer, sale and issuance of the
Debentures do not require registration under the Securities Act
or any applicable state securities laws.
(b) The Company has not granted, or agreed to
grant or issue, any options, warrants or rights to purchase or
acquire from the Company any shares of capital stock of the
Company, and there are no contracts, commitments, agreements,
understandings, arrangements or restrictions as to which the
Company is a party, or by which it is bound, relating to any
shares of capital stock or other securities of the Company,
whether or not outstanding except for (i) the Debentures to be
issued pursuant to this Agreement, (ii) 314,164 shares of Common
Stock reserved for issuance pursuant to the Company's 1988 Stock
Option Plan, for which options to purchase 99,010 shares are
outstanding, (iii) a warrant to acquire 100,000 shares of Common
Stock held by Chase Manhattan Capital Corporation, and (iv) the
obligation to issue to Osprey Partners, in certain circumstances,
a warrant to purchase 125,000 shares of Common Stock.
Schedule 2.2 sets forth a summary of such options, warrants and
other rights to acquire capital stock of the Company.
Section 2.3 Authorization.
The Company has full legal right, power and authority
to enter into and perform its obligations under this Agreement
and any of the other Operative Documents, without the consent or
approval of any other person, firm, governmental agency or other
legal entity. The execution and delivery of this Agreement, the
issuance of the Debentures hereunder, the execution and delivery
of each other document in connection herewith or therewith to
which the Company is a party, and the performance by the Company
of its obligations hereunder and/or thereunder are within the
corporate powers of the Company and have been duly authorized by
all necessary corporate action properly taken, and have received
all necessary governmental approvals, if any were required. The
consummation of the transactions contemplated by this Agreement
and the fulfillment of the terms hereof do not and will not
contravene or conflict with the Articles of Incorporation or
Bylaws of the Company or any material agreement to which the
Company or any of its Subsidiaries is now a party or by which any
of them or their properties is bound, or constitute a default
thereunder; or results in the creation or imposition of any lien,
charge, security interest, or encumbrance of any nature upon any
of the property or assets of the Company or any of its
Subsidiaries pursuant to the terms of any such agreement or
instrument; or violates any provision of law or any applicable
judgment, ordinance, regulation or order of any court or
governmental agency. The officer(s) executing this Agreement,
the Debentures and any other document executed and delivered by
Purchaser in connection herewith or therewith, is duly authorized
to act on behalf of the Company.
Section 2.4 Validity and Binding Effect.
Each of the Operative Documents is the legal, valid and
binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as enforcement may
be limited by bankruptcy, insolvency or other matters affecting
the rights of creditors generally and general principles of
equity.
Section 2.5 Other Transactions.
Except as disclosed on Schedule 2.5, there are no
outstanding loans, liens, pledges, security interests, agreements
or other financings upon which the Company or any Subsidiary is
obligated or by which the Company is bound. Consummation of the
transactions hereby contemplated and the performance of the
obligations of the Company under and by virtue of the Operative
Documents will not result in any breach of, or constitute a
default under, any material mortgage, security deed or agreement,
deed of trust, lease, bank loan or credit agreement, or any
corporate articles, certificate or bylaws, agreement or
certificate of limited partnership, partnership agreement,
limited liability company agreement, license, franchise or any
other material instrument or agreement to which the Company is a
party or by which the Company or its properties may be bound or,
to the knowledge of the Company, affected or to which the Company
has not obtained an effective waiver.
Section 2.6 Litigation.
Except as set forth on Schedule 2.6, there is no
litigation, arbitration, claim, proceeding or investigation
pending or threatened in writing which the Company or any
Subsidiary is a party or to which any of its respective
properties or assets is the subject which, if determined
adversely to the Company or such Subsidiary, would individually
or in the aggregate have a material adverse effect on the
financial position, results of operations or business of the
Company and its Subsidiaries, taken as a whole.
Section 2.7 Financial Statements.
The consolidated financial statements of the Company
and its Subsidiaries for the fiscal years ended February 25,
1994, February 24, 1995, and February 23, 1996, and the unaudited
consolidated financial statements as of the nine (9) months ended
November 29, 1996, which the Company previously has delivered to
Purchaser, fairly present the financial condition of the Company
and its Subsidiaries, as at the respective dates of and for the
periods referred to in such financial statements and have been
prepared in accordance with generally accepted accounting
principles ("GAAP") consistently followed throughout the periods
involved. The consolidated balance sheets and the related notes
fairly present the financial condition of the Company and its
consolidated Subsidiaries as of the respective dates thereof, and
the consolidated statements of income, cash flows and changes in
stockholders' equity and the related notes fairly present the
results of operations of the Company and its consolidated
Subsidiaries for the respective periods indicated. There has
been no material adverse change in the financial condition of the
Company and its Subsidiaries taken as a whole since November 29,
1996.
Section 2.8 SEC Reports.
The Company's Common Stock is listed on the American
Stock Exchange and has been duly registered with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Since February 26,
1993, the Company has filed all reports, registrations, proxy or
information statements and all other documents, together with any
amendments required to be made thereto, required to be filed with
the SEC under the Securities Act and the Exchange Act
(collectively, the "SEC Reports"). All SEC Reports since
February 26, 1995, have been timely filed. The Company
previously has furnished to Purchaser true copies of all the SEC
Reports, together with all exhibits thereto that Purchaser has
requested. As of their respective dates, the SEC Reports
complied (or will comply, as the case may be) in all material
respects with all rules and regulations promulgated by the SEC
and did not (or will not, as the case may be) contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading.
Section 2.9 Absence of Changes.
Since November 29, 1996, (i) neither the Company nor
any of its Subsidiaries have incurred any liabilities or
obligations, direct or contingent, or entered into any
transactions, not in the ordinary course business, that are
material to the Company, (ii) neither the Company nor any of its
Subsidiaries have purchased any of its outstanding capital stock
or declared, paid or otherwise made any dividend or distribution
of any kind on its capital stock, (iii) there has not been any
change in the capital stock, long-term debt or short-term debt of
the Company, and (iv) there has not been any material adverse
change, or any development involving a prospective material
adverse change, in or affecting the condition (financial or
otherwise), results of operations, business or prospects of the
Company or any Subsidiary, taken as a whole.
Section 2.10 No Defaults.
Except as set forth on Schedule 2.10 and except where a
default or event of default does not and would not constitute a
Material Adverse Event, no default or event of default by the
Company or any Subsidiary exists under this Agreement or any of
the other Operative Documents, or under any other instrument or
agreement to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary or its respective properties
may be bound or, to the knowledge of the Company, affected, and
no event has occurred and is continuing that with notice or the
passage of time or both would constitute a default or event of
default thereunder.
Section 2.11 Compliance With Law.
To the Company's knowledge, the Company and any
Subsidiary are in compliance with all laws, regulations, decrees
and orders applicable to them (including but not limited to the
Foreign Corrupt Practices Act, laws, regulations, decrees and
orders relating to environmental, occupational and health
standards and controls, antitrust, monopoly, restraint of trade
or unfair competition) to the extent that noncompliance, in the
aggregate, cannot reasonably be expected to cause a Material
Adverse Event.
Section 2.12 Taxes.
Except as set forth on Schedule 2.12, the Company and
its Subsidiaries have filed or caused to be filed all federal,
state and local income, excise and franchise tax returns required
to be filed (except for returns that have been appropriately
extended), and has paid, or provided for the payment of, all
taxes shown to be due and payable on said returns and all other
taxes, impositions, assessments, fees or other charges imposed on
it by any governmental authority, agency or instrumentality,
prior to any delinquency with respect thereto (other than taxes,
impositions, assessments, fees and charges currently being
contested in good faith by appropriate proceedings, for which
appropriate amounts have been reserved), and the Company does not
know of any proposed assessment for additional taxes or any basis
therefor. No tax liens have been filed against the Company or
any of its properties. The Company's federal income tax
liability has been finally determined by the Internal Revenue
Service and satisfied for all taxable years up to and including
the taxable year ended February 24, 1995, or closed by applicable
statutes of limitation.
Section 2.13 Certain Transactions.
Except as set forth on Schedule 2.13(i) and except as
to indebtedness incurred in the ordinary course of business and
approved by the Board of Directors of the Company, neither the
Company nor any Subsidiary is indebted, directly or indirectly,
to any of its officers or directors, or to their respective
spouses or children, in excess of an aggregate amount of $60,000,
and none of the officers or directors or any members of their
immediate families are indebted to the Company or any Subsidiary
in excess of an aggregate amount of $60,000 or have any direct or
indirect ownership interest in any firm or corporation with which
the Company or any Subsidiary is affiliated or with which the
Company has a business relationship, or any firm or corporation
which competes with the Company or any Subsidiary, except that
officers and/or directors of the Company may own no more than
4.9% of the outstanding stock of any publicly traded company
which competes directly with the Company. Except as set forth on
Schedule 2.13(ii), no officer or director of the Company or any
Subsidiary or any member of their immediate families is, directly
or indirectly, interested in any material contract with the
Company or any Subsidiary. Except as set forth on
Schedule 2.13(iii), neither the Company nor any Subsidiary is a
guarantor or indemnitor of any indebtedness of any other person,
firm or corporation.
Section 2.14 Title to Property.
The Company and each Subsidiary has good and
marketable title to all of real and material personal property
owned by it, free and clear of all liens, security interests,
pledges, encumbrances, equities claims and restrictions of every
kind and nature whatsoever, except as disclosed on Schedule 2.14
and except for such liens, security interests, pledges,
encumbrances, equities claims and restrictions which are not in
the aggregate material to the business, operations or financial
condition of the Company and its Subsidiaries taken as a whole.
Any real property and buildings held under lease by the Company
or any Subsidiary are held under valid existing and enforceable
leases, except as disclosed on Schedule 2.14 or which are not
material and do not interfere with the use to be made of such
buildings or property by the Company.
Section 2.15 Intellectual Property.
Except as set forth in Schedule 2.15, the Company is
the lawful owner or has a valid right to use the proprietary
information used in its business free and clear of any claim,
right, trademark, patent or copyright protection of any third
party. As used herein, "proprietary information" includes
without limitation (i) any computer software and related
documentation, inventions, technical and nontechnical data
related thereto, and (ii) other documentation, inventions and
data related to patterns, plans, methods, techniques, drawings,
finances, customer lists, suppliers, products, special pricing
and cost information, designs, processes, procedures, formulas,
research data owned or used by the Company or any Subsidiary or
marketing studies conducted by the Company, all of which the
Company considers to be commercially important and competitively
sensitive and which generally has not been disclosed to third
parties other than customers in the ordinary course of business.
Except as set forth in Schedule 2.15, the Company has good and
marketable title to or has a valid right to use all patents,
trademarks, trade names, service marks, copyrights or other
intangible property rights, and registrations or applications for
registration thereof, owned by the Company or any Subsidiary or
used or required by the Company or any Subsidiary in the
operation of its business as presently being conducted. The
Company has no knowledge of any infringements or conflict with
asserted rights of others with respect to copyrights, patents,
trademarks, service marks, trade names, trade secrets or other
intangible property rights or know-how which could cause a
Material Adverse Event. To the Company's knowledge, no products
or processes of the Company infringe or conflict with any rights
of patent or copyright, or any discovery, invention product or
process, that is the subject of a patent or copyright application
or registration known to the Company. The Company has adopted
and follows such procedures as the Company deems necessary or
appropriate to provide reasonable protection of the Company's
trade secrets and proprietary rights in intellectual property of
all kinds. To the knowledge of the Company, no person employed
by or affiliated with the Company has employed or proposes to
employ any trade secret or any information or documentation
proprietary to any former employer, and to the knowledge of the
Company, no person employed by or affiliated with the Company has
violated any confidential relationship that such person may have
had with any third person, in connection with the development,
manufacture or sale of any product or proposed product or the
development or sale of any service or proposed service of the
Company.
Section 2.16 Accounting Matters.
The Company and each of its Subsidiaries maintain a
system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted
accounting principles and to maintain assets accountability for
the assets of the Company and each of its Subsidiaries;
(iii) access to the assets of the Company and each of its
Subsidiaries are permitted only in accordance with management's
general or specific authorization; and (iv) the recorded
accountability for assets of the Company and each of its
Subsidiaries are compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences.
Section 2.17 Distributions to Company.
No Subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company,
from making any other distributions on such Subsidiary's capital
stock, from repaying to the Company any loans or advances to such
Subsidiary or from transferring any of such Subsidiary's property
or assets to the Company or any other Subsidiary of the Company.
Section 2.18 Prior Sales.
All offers and sales of the Company's capital stock
prior to the date hereof were at all relevant times (i) exempt
from the registration requirements of the Securities Act or were
registered under the Securities Act; and (ii) were duly
registered, and were the subject of an available exemption from
the requirements of all applicable state securities or Blue Sky
laws or met the requirements of such laws.
Section 2.19 Regulatory Compliance.
Except as set forth on Schedule 2.19, the conduct of
the business of the Company is not (and is not intended to be, as
hereinafter conducted) dependent on any license, permit or other
authorization of any federal, state or local regulatory body, and
except as set forth on Schedule 2.19, such business is not
subject to the regulation of any federal, state or local
government regulatory body by reason of the nature of the
business being conducted. All licenses, permits and
authorizations set forth on Schedule 2.19 are in full force and
effect.
Section 2.20 1940 Act Compliance.
The Company is an "eligible portfolio company" as such
term is defined in Section 2(a)(46) of the Investment Company Act
of 1940, as amended (the "Investment Company Act"), and the
issuance and sale by the Company of the Debentures does not
constitute a "public offering" as such term is used in Section
55(a)(1) thereof.
Section 2.21 Registration Rights.
Except as described in Schedule 2.21, the Company is
not under any obligation to register under the Securities Act or
the Trust Indenture Act of 1939, as amended, any of its presently
outstanding securities or any of its securities that may
subsequently be issued.
Section 2.22 Environment.
The Company has duly complied, in all material
respects, with, and its business, operations, assets, equipment,
property, leaseholds or other facilities are in compliance, in
all material respects, with, the provisions of all federal, state
and local environmental, health, and safety laws, codes and
ordinances, and all rules and regulations promulgated thereunder.
The Company has been issued and will maintain all required
federal, state and local permits, licenses, certificates and
approvals relating to (1) air emissions; (2) discharges to
surface water or groundwater; (3) noise emissions; (4) solid or
liquid waste disposal; (5) the use, generation, storage,
transportation or disposal of toxic or hazardous substances or
wastes (which shall include any and all such materials listed in
any federal, state or local law, code or ordinance and all rules
and regulations promulgated thereunder as hazardous or
potentially hazardous); or (6) other environmental, health or
safety matters. The Company has not received notice of, or knows
of, or suspects facts which might constitute any violations of
any federal, state or local environmental, health or safety laws,
codes or ordinances, and any rules or regulations promulgated
thereunder with respect to its businesses, operations, assets,
equipment, property, leaseholds, or other facilities. Except in
accordance with a valid governmental permit, license, certificate
or approval, there has been no emission, spill, release or
discharge into or upon (1) the air; (2) soils, or any
improvements located thereon; (3) surface water or groundwater;
or (4) the sewer, septic system or waste treatment, storage or
disposal system servicing the premises, of any toxic or hazardous
substances or wastes at or from the premises. There has been no
complaint, order, directive, claim, citation or notice by any
governmental authority or any person or entity with respect to
(1) air emissions; (2) spills, releases or discharges to soils or
improvements located thereon, surface water, groundwater or the
sewer, septic system or waste treatment, storage or disposal
systems servicing the premises; (3) noise emissions; (4) solid or
liquid waste disposal; (5) the use, generation, storage,
transportation or disposal of toxic or hazardous substances or
waste; or (6) other environmental, health or safety matters
affecting the Company or its business, operations, assets,
equipment, property, leaseholds or other facilities. The Company
does not have any indebtedness, obligation or liability (absolute
or contingent, matured or not matured), with respect to the
storage, treatment, cleanup or disposal of any solid wastes,
hazardous wastes or other toxic or hazardous substances
(including without limitation any such indebtedness, obligation,
or liability with respect to any current regulation, law or
statute regarding such storage, treatment, cleanup or disposal).
Section 2.23 Insurance.
The Company has maintained, and has caused each
Subsidiary to maintain, insurance coverage by financially sound
and reputable insurers with respect to their respective
properties and business in such forms and amounts and against
such risks, casualties and contingencies as are customary for
corporations of established reputation engaged in the same or a
similar business and owning and operating similar properties.
Section 2.24 Governmental Consents.
No consent, approval, qualification, order or
authorization of, or filing with, any local, state, or federal
governmental authority is required on the part of the Company in
connection with the Company's valid execution, delivery, or
performance of this Agreement or the offer, sale or issuance of
the Debenture by the Company.
Section 2.25 Offering.
Subject in part to the truth and accuracy of
Purchaser's representations set forth in this Agreement, the
offer, sale and issuance of the Debenture as contemplated by this
Agreement are exempt from the registration requirements of the
Securities Act, and neither the Company nor any authorized agent
acting on is behalf will take any action hereafter that would
cause the loss of such exemption.
Section 2.26 Manufacturing Rights.
The Company has not granted rights to manufacture,
produce, assemble, license, market, or sell its products to any
other person and is not bound by any agreement that affects the
Company's exclusive right to develop, manufacture, assemble,
distribute, market, or sell its products.
Section 2.27 Employees.
To the best of the Company's knowledge, there is no
strike, labor dispute or union organization activities pending or
threatened between it and its employees. None of the Company's
employees belongs to any union or collective bargaining unit. To
the best of its knowledge, the Company has complied in all
material respects with all applicable state and federal equal
opportunity and other laws related to employment. To the best of
the Company's knowledge, no employee of the Company is or will be
in violation of any judgment, decree, or order, or any term of
any employment contract, patent disclosure agreement, or other
contract or agreement relating to the relationship of any such
employee with the Company, or any other party because of the
nature of the business conducted or presently proposed to be
conducted by the Company or to the use by the employee of his or
her best efforts with respect to such business. The Company is
not a party to or bound by any currently effective employment
contract, deferred compensation agreement, bonus plan, incentive
plan, profit sharing plan, retirement agreement, or other
employee compensation agreement. The Company is not aware that
any officer or key employee, or that any group of key employees,
intends to terminate their employment with the Company, nor does
the Company have a present intention to terminate the employment
of any of the foregoing. Subject to general principles related
to wrongful termination of employees, the employment of each
officer and employee of the Company is terminable at the will of
the Company.
Section 2.28 Fees/Commissions.
The Company has not agreed to pay any finder's fee,
commission, origination fee (except for the processing fee due to
Purchaser pursuant to Section 1.3 hereof) or other fee or charge
to any person or entity with respect to the transactions
contemplated hereunder, except a fee of $529,981.23 payable to
Berwind Financial Group, L.P., and a fee of $75,000.00 payable to
First Union National Bank.
Section 2.29 1940 Act Compliance.
The Company is an "eligible portfolio company" as such
term is defined in Section 2(a)(46) of the Investment Company Act
of 1940, as amended (the "Investment Company Act"), and the
issuance and sale by the Company of the Preferred Stock does not
constitute a "public offering" as such term is used in Section
55(a)(1) thereof.
Section 2.30 ERISA.
Except as disclosed in Schedule 2.30, the Company is in
compliance in all material respects with all applicable
provisions of Title IV of the Employee Retirement Income Security
Act of 1974, Pub. L. No. 93-406, September 2, 1974, 88 Stat. 829,
29 U.S.C.A. Sections 1001 et seq. (1975), as amended from time to time
("ERISA"). Except as disclosed in Schedule 2.30, neither a
reportable event nor a prohibited transaction (as defined in
ERISA) has occurred and is continuing with respect to any
"pension plan" (as such term is defined in ERISA, a "Plan"); no
notice of intent to terminate a Plan has been filed nor has any
Plan been terminated; no circumstances exist which constitute
grounds entitling the Pension Benefit Guaranty Corporation
(together with any entity succeeding to or all of its functions,
the "PBGC") to institute proceedings to terminate, or appoint a
trustee to administer, a Plan, nor has the PBGC instituted any
such proceedings; neither the Company nor any commonly controlled
entity (as defined in ERISA) has completely or partially
withdrawn from a multiemployer plan (as defined in ERISA); The
Company and each commonly controlled entity has met its minimum
funding requirements under ERISA with respect to all of its Plans
and the present fair market value of all Plan property exceeds
the present value of all vested benefits under each Plan, as
determined on the most recent valuation date of the Plan and in
accordance with the provisions of ERISA and the regulations
thereunder for calculating the potential liability of The Company
or any commonly controlled entity to the PBGC or the Plan under
Title IV or ERISA; and neither the Company nor any commonly
controlled entity has incurred any liability to the PBGC under
ERISA.
Section 2.31 Disclosure.
No representation or warranty given as of the date
hereof by the Company contained in this Agreement or any schedule
attached hereto or any statement in any document, certificate or
other instrument furnished or to be furnished to the Purchaser
pursuant hereto, taken as a whole, contains or will (as of the
time so furnished) contain any untrue statement of a material
fact, or omits or will (as of the time so furnished) omit to
state any material fact which is necessary in order to make the
statements contained herein or therein not misleading.
Section 2.32 Survival.
The representations and warranties of the Company
contained in this Agreement shall survive until this Agreement
terminates in accordance with Section 11.5 hereof.
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser hereby represents to the Company as
follows:
Section 3.1 Authorization.
Purchaser has full legal right, power and authority to
enter into and perform its obligations under this Agreement and
any other document executed and delivered by Purchaser in
connection herewith, without the consent or approval of any other
person, firm, governmental agency or other legal entity. The
execution and delivery of this Agreement and any other document
executed and delivered by Purchaser in connection herewith, and
the performance by Purchaser of its obligations hereunder and/or
thereunder are within the corporate powers of Purchaser, have
received all necessary governmental approvals, if any were
required, and do not and will not contravene or conflict with the
Charter or Bylaws of Purchaser. The officer(s) executing this
Agreement and any other document executed and delivered by
Purchaser in connection herewith, is duly authorized to act on
behalf of Purchaser.
Section 3.2 Validity and Binding Effect.
This Agreement and any other document executed and
delivered by Purchaser in connection herewith are the legal,
valid and binding obligations of the Purchaser, enforceable
against it in accordance with their respective terms.
Section 3.3 Purchase for Investment.
Purchaser is a registered investment company under the
Investment Company Act. Purchaser is acquiring the Debentures
for its own account, for investment, and not with a view to the
distribution or resale thereof, in whole or in part, in violation
of the Securities Act or any applicable state securities law, and
Purchaser has no present intention of selling, negotiating or
otherwise disposing of the Debentures; it being understood that
Purchaser intends to transfer and assign the Debentures and all
Purchaser's rights and obligations under this Agreement to one or
more wholly-owned Subsidiaries of Purchaser.
Section 3.4 Survival.
The representations and warranties of the Purchaser
contained in this Agreement shall survive until this Agreement
terminates in accordance with Section 11.5 hereof.
ARTICLE IV - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PURCHASER
The obligation of Purchaser to purchase and pay for the
Debentures on the Closing Date shall be subject to the
fulfillment on or before the Closing Date of each of the
following conditions:
Section 4.1 Representations and Warranties.
The representations and warranties of the Company
contained in this Agreement and in any Schedule hereto or any
document or instrument delivered to Purchaser or its
representatives hereunder, shall have been true and correct when
made and shall be true and correct as of the Closing Date as if
made on such date, except to the extent such representations and
warranties expressly relate to a specific date. The Company
shall have duly performed all of the covenants and agreements to
be performed by it hereunder on or prior to the Closing Date.
Section 4.2 Officer's Certificate.
The Company shall have delivered to Purchaser a
certificate, dated the Closing Date, signed by a duly authorized
officer of the Company substantially in the form attached hereto
as Exhibit C.
Section 4.3 Satisfactory Proceedings.
All proceedings taken in connection with the
transactions contemplated by this Agreement, and all documents
necessary to the consummation thereof, shall be satisfactory in
form and substance to Purchaser and Purchaser's counsel, and the
Company shall have delivered to Purchaser a certificate, dated
the Closing Date, signed by the Secretary of the Company
substantially in the form attached hereto as Exhibit D.
Section 4.4 Legal Opinion.
Purchaser shall have received the opinion of Stevens &
Lee, A Professional Corporation, counsel for the Company, dated
the Closing Date, addressed to Purchaser, in form and substance
satisfactory to Purchaser, and covering the matters set forth in
Exhibit E hereto.
Section 4.5 The Company's Existence and Authority.
The Company shall have delivered to Purchaser the
following certificates of public officials, in each case as of a
recent date:
(a) the Articles of Incorporation of the Company,
certified by the Secretary of State of Pennsylvania;
(b) a certificate of existence or good standing
of the Company in the State of Pennsylvania and as a foreign
corporation in each of the jurisdictions set forth in
Schedule 2.1(a);
(c) the Articles of Association and the
equivalent under applicable laws of a certificate of good
standing for ETC International Corporation.
Section 4.6 Delivery of Operative Documents.
The Company shall have delivered to Purchaser the
following executed documents simultaneously with the execution of
this Agreement:
(a) the Debenture;
(b) the Warrant;
(c) the Registration Rights Agreement between the
Company and the Purchaser; and
(d) the Subordination Agreement between First
Union National Bank ("FUNB"), the Company, and the Purchaser,
all of which shall be dated as of March 27, 1997.
Section 4.7 Sale of Preferred Stock.
The closing of the purchase and sale of 25,000 shares
of the Company's Series A Convertible Preferred Stock (the
"Series A Preferred Stock") shall have occurred simultaneously
with the closing hereunder.
Section 4.8 Closing of FUNB Financing.
The closing of the initial borrowing under the
Revolving Credit Agreement between the Company and FUNB, dated as
of March 27, 1997 (the "FUNB Facility") shall have occurred
simultaneously with the closing hereunder.
Section 4.9 Required Consents.
Any consents or approvals required to be obtained from
any third party, including any holder of indebtedness or any
outstanding security of the Company, and any amendments of
agreements which shall be necessary to permit the consummation of
the transactions contemplated hereby on the Closing Date, shall
have been obtained and all such consents or amendments shall be
satisfactory in form and substance to Purchaser and Purchaser's
counsel.
Section 4.10 Waiver of Conditions.
If on the Closing Date the Company fails to tender to
Purchaser the Debentures to be issued to Purchaser on such date
or if the conditions specified in this Article IV have not been
fulfilled, Purchaser may thereupon elect to be relieved of all
further obligations under this Agreement. Without limiting the
foregoing, if the conditions specified in this Article IV have
not been fulfilled, Purchaser may waive compliance by the Company
with any such condition to such extent as Purchaser, in
Purchaser's sole discretion, may determine. Nothing in this
Section 4.7 shall operate to relieve the Company of any of its
obligations hereunder or to waive any of Purchaser's rights
against the Company.
ARTICLE V - COVENANTS OF COMPANY
From and after the Closing Date and continuing so long
as any amount remains unpaid on any of the Debentures:
Section 5.1 Use of Proceeds.
The Company shall use the proceeds of the Debentures
only for the purposes set forth on Schedule 5.1 attached hereto.
Section 5.2 Use of Proceeds from Settlement.
On October 1, 1996, the Thai Trade Arbitration Council
rendered a judgment in favor of the Company in connection with a
trade dispute with the Royal Thai Air Force ("RTAF"). If the
Company completes services to be performed under its contract
with RTAF by June 30, 1997, the Company will be entitled to
payment of approximately $450,000 from RTAF. If the Company
completes the contract and receives at least $400,000 of amounts
due, the Company may use such amount to prepay the bridge notes
made by the Company in favor of (a) William F. Mitchell dated
February 7, 1997, in the principal amount of $300,000,
(b) Pete L. Stephens, M.D., dated January 8, 1997, in the
principal amount of $240,000, and (c) Pete L. Stephens Profit-
Sharing Plan dated January 8, 1997, in the principal amount of
$60,000 (collectively, the "Bridge Notes"). The Company shall
not make any other payments of principal on the Bridge Notes
without the prior written consent of Purchaser.
Section 5.3 Payment of Debentures.
The Company shall pay the indebtedness evidenced by the
Debentures according to the terms thereof and shall timely pay or
perform all of the other obligations of the Company under this
Agreement.
Section 5.4 Repurchase of Debenture.
Neither the Company nor any Subsidiary or Affiliate,
directly or indirectly, may repurchase or make any offer to
repurchase any Debentures unless the offer has been made to
repurchase Debentures, pro rata, from all holders of the
Debentures at the same time and upon the same terms. In case the
Company repurchases or otherwise acquires any Debentures, such
Debentures shall immediately thereafter be canceled, and no
Debentures shall be issued in substitution therefor. Without
limiting the foregoing, upon the purchase or other acquisition of
any Debentures by the Company or any Subsidiary or Affiliate,
such Debentures shall no longer be outstanding for purposes of
any Section of this Agreement relating to the taking by the
holders of the Debentures of any actions with respect hereto,
including, without limitation, Sections 7.3 and 8.1.
Section 5.5 Corporate Existence, Etc.
The Company will preserve and keep in force and effect,
and will cause each Subsidiary to preserve and keep in force and
effect, its corporate existence and good standing in the state of
incorporation thereof, its qualification and good standing as a
foreign corporation in each jurisdiction where such qualification
is required by applicable law except where the failure to so
qualify would not have a material adverse effect on the financial
condition or results of operations of the Company and its
Subsidiaries, taken as a whole, and all licenses and permits
necessary to the proper conduct of its business.
Section 5.6 Maintenance, Etc.
The Company will maintain, preserve and keep, and will
cause each Subsidiary to maintain, preserve and keep, its
properties and assets which are used or useful in the conduct of
its business (whether owned in fee or pursuant to a leasehold
interest) in good repair and working order and from time to time
will make all necessary repairs, replacements, renewals and
additions so that at all times the efficiency thereof shall be
maintained.
Section 5.7 Nature of Business.
Neither the Company nor any Subsidiary will engage in
any business if, as a result, the general nature of the business,
taken on a consolidated basis, which would then be engaged in by
the Company and its Subsidiaries would be substantially changed
from the general nature of the business engaged in by the Company
and its Subsidiaries on the date of this Agreement.
Section 5.8 Insurance.
The Company will maintain, and will cause each
Subsidiary to maintain, insurance coverage by financially sound
and reputable insurers with respect to their respective
properties and business in such forms and amounts and against
such risks, casualties and contingencies as are customary for
corporations of established reputation engaged in the same or a
similar business and owning and operating similar properties.
Section 5.9 Taxes, Claims for Labor and Materials.
The Company will promptly pay and discharge, and will
cause each Subsidiary promptly to pay and discharge, (i) all
lawful taxes, assessments and governmental charges or levies
imposed upon the property or business of the Company or such
Subsidiary, respectively, (ii) all trade accounts payable in
accordance with usual and customary business terms, and (iii) all
claims for work, labor or materials, which if unpaid might become
a lien or charge upon any property of the Company or such
Subsidiary; provided the Company or such Subsidiary shall not be
required to pay any such tax, assessment, charge, levy, account
payable or claim if (i) the validity, applicability or amount
thereof is being contested in good faith by appropriate actions
or proceedings which will prevent the forfeiture or sale of any
property of the Company or such Subsidiary or any material
interference with the use thereof by the Company or such
Subsidiary, and (ii) the Company or such Subsidiary shall set
aside on its books, reserves deemed by it to be adequate with
respect thereto.
Section 5.10 Compliance with Laws.
Except where failure to do so does not and would not
constitute a Material Adverse Event, The Company shall maintain
its business operations and property owned or used in connection
therewith in compliance with (i) all applicable federal, state
and local laws, regulations and ordinances, and such laws,
regulations and ordinances of foreign jurisdictions, governing
such business operations and the use and ownership of such
property, and (ii) all agreements, licenses, franchises,
indentures and mortgages to which The Company is a party or by
which The Company or any of its properties is bound. Without
limiting the foregoing, The Company shall pay all of its
indebtedness promptly and substantially in accordance with the
terms thereof.
Section 5.11 ERISA Matters.
If the Company has in effect, or hereafter institutes,
a pension plan that is subject to the requirements of Title IV of
the Employee Retirement Income Security Act of 1974, Pub. L.
No. 93-406, September 2, 1974, 88 Stat. 829, 29 U.S.C.A. Section 1001
et seq. (1975), as amended from time to time ("ERISA"), then the
following covenants shall be applicable during such period as any
such plan (the "Plan") shall be in effect: (i) the Company
hereby covenants that throughout the existence of the Plan, the
Company's contributions under the Plan will meet the minimum
funding standards required by ERISA and the Company will not
institute a distress termination of the Plan; and (ii) the
Company covenants that it will send to Purchaser a copy of any
notice of a reportable event (as defined in ERISA) required by
ERISA to be filed with the Labor Department or the Pension
Benefit Guaranty Corporation, at the time that such notice is so
filed; provided, however, that the current violation of this
covenant as described in Schedule 2.30 shall not be a violation
of this Section 5.11 so long as such violation is cured within
ten (10) days of the date hereof.
Section 5.12 Books and Records; Rights of Inspection.
The Company will keep, and will cause each Subsidiary
to keep, proper books of record and account in which full and
correct entries will be made of all dealings or transactions of
or in relation to the business and affairs of the Company or such
Subsidiary, in accordance with generally accepted accounting
principles consistently maintained. The Company shall permit a
representative of Purchaser to visit any of its properties and
inspect its corporate books and financial records, and will
discuss its accounts, affairs and finances with a representative
of Purchaser, during reasonable business hours, at all such times
as Purchaser may reasonably request.
Section 5.13 Reports.
The Company will furnish to Purchaser the following:
(a) Monthly Statements. Within twenty-five (25)
days of the end of each month, beginning the month of April 1997,
monthly internal financial reports which at a minimum shall
consist of a balance sheet of the Company as of the close of such
month and related statements of income and cash flows for the
one-month period then ended, as well as any additional financial
reports for such period routinely prepared with respect to the
Company and the Subsidiaries;
(b) Quarterly Statements. As soon as available
and in any event within 45 days after the end of each quarterly
fiscal period (except the last) of each fiscal year, copies of:
(i) consolidated and consolidating balance
sheets of the Company and Subsidiaries as of the close of
the three month period then ended, setting forth in
comparative form the consolidated figures at the end of the
preceding fiscal year,
(ii) consolidated and consolidating
statements of income and retained earnings of the Company
and Subsidiaries for the three-month period then ended,
setting forth in comparative form the consolidated figures
for the corresponding period of the preceding fiscal year,
and
(iii) consolidated and consolidating
statements of cash flows of the Company and Subsidiaries for
the portion of the fiscal year ending with such three-month
period, setting forth in comparative form the consolidated
figures for the corresponding period of the preceding fiscal
year,
all in reasonable detail and accompanied by a certificate of an
authorized financial officer of Company that such financial
statements fairly represent the financial condition and results
of operations and cash flows of the Company at and for the
periods presented, subject to normal year end adjustment;
(c) Annual Statements. As soon as available and
in any event within 90 days after the close of each fiscal year
of the Company, copies of:
(i) consolidated and consolidating balance
sheets of the Company and Subsidiaries as of the close of
such fiscal year, and
(ii) consolidated and consolidating
statements of income and retained earnings and cash flows of
the Company and Subsidiaries for such fiscal year,
in each case setting forth in comparative form the consolidated
figures for the preceding fiscal year, all in reasonable detail
and accompanied by an unqualified report thereon of a firm of
independent public accountants of recognized national standing or
a firm reasonably acceptable to the Purchaser;
(d) Audit Reports. Promptly upon receipt
thereof, one copy of each interim or special audit made by
independent accountants of the books of the Company or any
Subsidiary;
(e) SEC and Other Reports. Promptly upon their
becoming available, one copy of each financial statement, report,
notice or proxy statement sent by the Company to stockholders
generally and of each periodic or current report, and any
registration statement or prospectus filed by the Company or any
Subsidiary with any securities exchange or the SEC or any
successor agency, and copies of any orders in any proceedings to
which the Company or any of its Subsidiaries is a party, issued
by any governmental agency, federal or state, having jurisdiction
over the Company or any of its Subsidiaries. The Company
specifically covenants to timely file each such item required to
be filed with the SEC and each state requiring securities laws
filings; and
(f) Requested Information. With reasonable
promptness, such other data and information as Purchaser or any
such institutional holder may reasonably request.
Section 5.14 Limitations on Debt and Obligations.
Except as to (i) indebtedness existing on the date
hereof and reflected on (a) the Company's unaudited balance sheet
as of November 29, 1996 and (b) Schedule 2.7, as the same
indebtedness may be extended or renewed (but not increased),
(ii) the indebtedness incurred pursuant to the Debentures,
(iii) accounts payable and other trade payables incurred in the
ordinary course of business, and (iv) obligations of the Company
pursuant to capitalized leases, (v) the FUNB Facility as extended
or renewed, but not to exceed $11,000,000 in principal amount;
neither the Company nor any Subsidiary shall incur additional
indebtedness in excess of $100,000 annually.
Section 5.15 Guaranties.
The Company will not, and will not permit any
Subsidiary to, become or be liable in respect of any Guaranty
except Guaranties by Company which are limited in amount to a
stated maximum dollar exposure and are incurred in compliance
with the provisions of this Agreement.
Section 5.16 Limitation on Liens.
Without the prior written consent of Purchaser, the
Company will not, and will not permit any Subsidiary to, create
or incur, or suffer to be incurred or to exist, any mortgage,
pledge, security interest, encumbrance, lien or charge of any
kind (collectively, "Liens") on its or their property or assets,
whether now owned or hereafter acquired, or upon any income or
profits therefrom, or transfer any property for the purpose of
subjecting the same to the payment of obligations in priority to
the payment of its or their general creditors, or acquire or
agree to acquire, or permit any Subsidiary to acquire, any
property or assets upon conditional sales agreement or other
title retention devices, except those Liens which exist as of the
date hereof as set forth on Schedule 2.14, and except:
the liens and security interests created or permitted
by the FUNB Credit Facility Operative Documents;
purchase money liens on and security interests in
equipment hereafter acquired securing Debt permitted by
Paragraph 5.13 of this Agreement, provided that such liens and
security interests attach only to the equipment so acquired and
do not encumber any other property of the Company or any
Subsidiary;
liens for taxes not yet payable or being contested in
good faith by appropriate proceedings and for which adequate
reserves have been provided on the books of the Company or a
Subsidiary;
mechanics', materialmen's, warehousemen's, carriers' or
other like liens arising in the ordinary course of business of
the Company or any Subsidiary, if any, arising with respect to
obligations which are not overdue for a period longer than thirty
(30) days or which are being contested in good faith by
appropriate proceedings and for which adequate reserves have been
provided on the books of the Company or a Subsidiary;
deposits or pledges to secure the performance of bids,
tenders, contracts, leases, public or statutory obligations,
surety or appeal bonds or other deposits or pledges for purposes
of a like general nature or given in the ordinary course of
business by the Company or any Subsidiary; and
other encumbrances consisting of zoning restrictions,
easements, restrictions on the use of real property or minor
irregularities in the title thereto, which do not arise in
connection with the borrowing of, or any obligation for the
payment of, money and which, in the aggregate, do not materially
detract from the value of the premises or the business,
properties or assets of the Company or any Subsidiary.
Section 5.17 Restricted Payments.
For so long as the Debentures are outstanding, the
Company will not, except as hereinafter provided:
(a) declare or pay any dividends, either in cash
or property, on any shares of its capital stock of any class
except (i) dividends or other distributions payable solely in
shares of capital stock of Company, and (ii) that the preferred
dividends on the Series A Preferred Stock may be paid provided no
Event of Default exists hereunder;
(b) directly or indirectly, or through any
Subsidiary, purchase, redeem or retire any shares of its capital
stock of any class or any warrants, rights or options to purchase
or acquire any shares of its capital stock (other than in
exchange for or out of the net proceeds to the Company from the
substantially concurrent issue or sale of other shares of capital
stock of the Company or warrants, rights or options to purchase
or acquire any shares of its capital stock; provided, however,
that the Company (i) may repurchase the warrant for 100,000
shares of Common Stock held by the Chase Manhattan Capital
Corporation and (ii) may effect the mandatory repurchase of the
Series A Convertible Preferred Stock in accordance with its
terms; or
(c) make any other payment or distribution,
either directly or indirectly or through any Subsidiary, in
respect of its capital stock.
Section 5.18 Investments.
The Company will not, and will not permit any
Subsidiary to, make any Investments outside the ordinary course
of business for the Company or any Subsidiary, without the prior
written consent of Purchaser, except:
(a) Investments in direct obligations of the
United States of America, or any agency or instrumentality of the
United States of America, the payment or guaranty of which
constitutes a full faith and credit obligation of the United
States of America, in either case maturing in twelve months or
less from the date of acquisition thereof;
(b) Investments in certificates of deposit
maturing within one year from the date of origin, issued by First
Union National Bank or a bank or trust company organized under
the laws of the United States or any state thereof, having
capital, surplus and undivided profits aggregating at least
$100,000,000 and whose long-term certificates of deposit are, at
the time of acquisition thereof by Company or a Restricted
Subsidiary, rated AA or better by Standard & Poor's Corporation
or Aa or better by Moody's Investors Service, Inc.;
(c) loans or advances in the usual and ordinary
course of business to officers, directors and employees for
expenses (including moving expenses related to a transfer)
incidental to carrying on the business of Company or any
Subsidiary; and
(d) receivables arising from the sale of goods
and services in the ordinary course of business of Company and
its Subsidiaries.
Section 5.19 Mergers, Consolidations and Sales of
Assets.
(a) The Company will not, and will not permit any
Subsidiary to (1) consolidate with or be a party to a merger or
share exchange with any other corporation or (2) sell, lease or
otherwise dispose of all or any substantial part (as defined in
paragraph (d) of this Section 5.18) of the assets of Company and
its Subsidiaries; provided, however, that:
(i) any Subsidiary may merge or consolidate
with or into the Company or any Wholly-owned Subsidiary so
long as in any merger or consolidation involving the
Company, the Company shall be the surviving or continuing
corporation;
(ii) the Company may consolidate or merger
with any other corporation if (A) the Company shall be the
surviving or continuing corporation, (B) at the time of such
consolidation or merger and after giving effect thereto, no
Default or Event of Default shall have occurred and be
continuing, and (C) after giving effect to such
consolidation or merger the Company would be permitted to
incur at least $1.00 of additional indebtedness under the
provisions of Section 5.13; and
(iii) any Subsidiary may sell, lease or
otherwise dispose of all or any substantial part of its
assets to the Company or any Wholly-owned Subsidiary.
(b) The Company will not permit any Subsidiary to
issue or sell any shares of stock of any class (including as
"stock" for the purposes of this Section 5.18, any warrants,
rights or options to purchase or otherwise acquire stock or other
Securities exchangeable for or convertible into stock) of such
Subsidiary to any Person other than the Company or a Wholly-owned
Subsidiary, except for the purpose of qualifying directors, or
except in satisfaction of the validly pre-existing preemptive
rights of minority shareholders in connection with the
simultaneous issuance of stock to the Company and/or a Subsidiary
whereby the Company and/or such Subsidiary maintain their same
proportionate interest in such Subsidiary.
(c) The Company will not sell, transfer or
otherwise dispose of any shares of stock in any Subsidiary
(except to qualify directors) or any indebtedness of any
Subsidiary, and will not permit any Subsidiary to sell, transfer
or otherwise dispose of (except to the Company or a Wholly-owned
Subsidiary) any shares of stock or any indebtedness of any other
Subsidiary, unless:
(1) simultaneously with such sale, transfer
or disposition, all shares of stock and all indebtedness of
such Subsidiary at the time owned by the Company and by
every other Subsidiary shall be sold, transferred or
disposed of as an entirety;
(2) the Board of Directors of the Company
shall have determined, as evidenced by a resolution thereof,
that the retention of such stock and indebtedness is no
longer in the best interests of the Company;
(3) such stock and Indebtedness is sold,
transferred or otherwise disposed of to a Person, for a cash
consideration and on terms reasonably deemed by the Board of
Directors to be adequate and satisfactory;
(4) the Subsidiary being disposed of shall
not have any continuing investment in the Company or any
other Subsidiary not being simultaneously disposed of; and
(5) such sale or other disposition does not
involve a substantial part (as hereinafter defined) of the
assets of the Company and its Subsidiaries taken as a whole.
(d) As used in this Section 5.18, a sale, lease
or other disposition of assets shall be deemed to be a
"substantial part" of the assets of the Company and its
Subsidiaries only if the book value of such assets, when added to
the book value of all other assets sold, leased or otherwise
disposed of by the Company and its Subsidiaries (other than in
the ordinary course of business) during the same twelve month
period ending on the date of such sale, lease or other
disposition, exceeds 15% of the consolidated net tangible assets
of the Company and its Subsidiaries determined as of the end of
the immediately preceding fiscal year.
Section 5.20 Transactions with Affiliates.
The Company will not, and will not permit any
Subsidiary to, enter into or be a party to any transaction or
arrangement with any officer, director or Affiliate (including,
without limitation, the purchase from, sale to or exchange of
property with, or the rendering of any service by or for, any
Affiliate), except in the ordinary course of and pursuant to the
reasonable requirements of the Company's or such Subsidiary's
business and upon fair and reasonable terms no less favorable to
Company or such Subsidiary than would obtain in a comparable
arm's-length transaction with a Person other than an Affiliate,
in each case as determined in good faith by a majority of the
disinterested directors of the Company.
Section 5.21 Notice.
The Company shall promptly upon the discovery thereof
give written notice to Purchaser of (i) the occurrence of any
default or Event of Default or event which, with the passage of
time, would constitute an Event of Default, under this Agreement,
(ii) the occurrence of any default or event of default under any
other agreement providing for indebtedness of the Company or any
Subsidiary or under a capitalized lease obligation, (iii) any
actions, suits or proceedings instituted by any Person against
the Company or a Subsidiary or materially affecting any of the
assets of the Company or any Subsidiary, and (iv) any dispute
between the Company or any Subsidiary, on the one hand, and any
governmental regulatory body, on the other hand, which dispute
might interfere with the normal operations of the Company or any
Subsidiary; provided, however, that Purchaser shall not be
required by this Agreement to disclose any such information
provided in (iii) or (iv) above to any third party other than
Purchaser's counsel and except to the extent compelled by law or
otherwise authorized by the Company.
Section 5.22 Observer Rights.
For so long as the Debentures shall remain outstanding,
provided that no nominee of the initial Purchaser is a director,
the Company shall invite one representative of Purchaser to
attend, at the Company's expense, all meetings of the Company's
Board of Directors and all committees of the Company's Board of
Directors in a nonvoting capacity and, in this respect, shall
give such representative copies of all notices and meeting agenda
in advance of such meetings and shall permit such representative
to review all documents and other materials provided to directors
at such meetings. The Company shall also provide Purchaser, in
advance, with copies of all actions proposed to be taken by the
Board of Directors in lieu of meeting.
Section 5.23 Information.
The Company will furnish to Purchaser such financial
data and other information relating to the business of the
Company as Purchaser may from time to time reasonably request.
In addition to the foregoing, no later than ninety (90) days
after the sale of the Debentures, the Company shall furnish
Purchaser a certificate, executed by the President of the
Company, itemizing the use of proceeds from the Debentures, and
the Company shall cooperate with Purchaser in connection with
post-closing review.
Section 5.24 Further Assurances.
The Company will take all actions reasonably requested
by Purchaser to effect the transactions contemplated by this
Agreement and the other Operative Documents.
Section 5.25 Optional Redemptions of Debentures.
The Debentures may not be redeemed, repaid or
repurchased by the Company at the option of the Company or any
Subsidiary or Affiliate at any time prior to the second
anniversary of the date of initial issuance of the Debentures.
On and after the second anniversary of the date of initial
issuance, the Debentures shall be subject to redemption, at the
Company's option, in whole at any time or in part from time to
time, provided that in case of each redemption at the Company's
option hereunder, the Company will give written notice thereof
to each holder of a Debenture to be redeemed not less than forty-
five (45) nor more than seventy-five (75) days prior to the date
fixed for such redemption (the "Redemption Date"), in each case
specifying the Redemption Date, the aggregate principal amount of
the Debentures to be redeemed on such date and the principal
amount of Debentures held by such holder to be redeemed on such
date. In the case of a redemption of part of the Debentures,
such redemption shall be effected pro rata among all holders of
Debentures.
ARTICLE VI - SUBORDINATION OF DEBENTURES
Section 6.1 Subordination.
The indebtedness evidenced by the Debentures, including
principal and interest, shall be subordinate and junior to the
prior payment of the indebtedness of the Company for borrowed
money only as set forth in that certain Subordination Agreement
dated as of March 27, 1997, between FUNB, the Company, and
Purchaser (such indebtedness described therein referred to herein
as, the "Senior Indebtedness"), and the indebtedness evidenced by
the Debentures shall be senior in right of payment to all other
indebtedness of the Company, which is expressly stated to be
subordinate or junior in any respect to other indebtedness of the
Company, including the Debentures.
ARTICLE VII - EVENTS OF DEFAULT; REMEDIES
Section 7.1 Events of Default.
The occurrence of any one of the following shall
constitute an "Event of Default" under this Agreement:
(a) Default shall occur in the payment of
interest on any Debenture when the same shall have become due; or
(b) Default shall occur in the making of any
payment of the principal of any Debenture or the premium, if any,
by the Company thereon at the expressed or any accelerated
maturity date or at any date fixed by the Company for prepayment;
or
(c) Default shall be made in the payment of the
principal of or interest on any indebtedness (other than the
Debentures) of the Company or any Subsidiary and such default
shall continue beyond the period of grace, if any, allowed with
respect thereto; or
(d) Default or the happening of any event shall
occur under any indenture, agreement, or other instrument under
which any indebtedness (other than the Debentures) of the Company
or any Subsidiary may be issued and such default or event shall
continue for a period of time sufficient to permit the
acceleration of the maturity of any such indebtedness of the
Company or any Subsidiary outstanding thereunder; or
(e) Default shall occur in the observance or
performance of any covenant or agreement contained in Section 5.3
or Sections 5.13 through 5.19 hereof; or
(f) Default shall occur in the observance or
performance of any other provision of this Agreement which is not
remedied within thirty (30) days after the earlier of (i) the
date on which the Company first obtains knowledge of such Default
and (ii) the date on which written notice thereof is given to the
Company by the holder of any Debenture; or
(g) Any representation or warranty made by the
Company herein, or made by the Company in any statement or
certificate furnished by the Company in connection with the
consummation of the issuance and delivery of the Debentures or
furnished by the Company pursuant hereto, is untrue in any
material respect as of the date of the issuance or making
thereof; or
(h) Final judgment or judgments for the payment
of money aggregating in excess of either (i) $100,000 in the
United States, the United Kingdom, Canada, or any other
jurisdiction in which the common law applies or (ii) $500,000 in
any other jurisdiction, is or are outstanding against the Company
or any Subsidiary or against any property or assets of either and
any one of such judgments has remained unpaid, unvacated,
unbonded or unstayed by appeal or otherwise for a period of
thirty (30) days from the date of its entry; or
(i) The Company or any Subsidiary becomes
insolvent or bankrupt, is generally not paying its debts as they
become due or makes an assignment for the benefit of creditors,
or the Company or any Subsidiary applies for or consents to the
appointment of a custodian, trustee, liquidator, or receiver for
the Company or such Subsidiary or for the major part of the
property of either; or
(j) A custodian, trustee, liquidator, or receiver
is appointed for the Company or any Subsidiary or for the major
part of the property of either and is not discharged within sixty
(60) days after such appointment; or
(k) Bankruptcy, reorganization, arrangement or
insolvency proceedings, or other proceedings for relief under any
bankruptcy or similar law or laws for the relief of debtors, are
instituted by or against the Company or any Subsidiary and, if
instituted against the company or any Subsidiary, are consented
to or are not dismissed within sixty (60) days after such
institution.
Section 7.2 Notice to Holders.
When any Event of Default described in the foregoing
Section 7.1 has occurred, or if the holder of any Debenture or of
any other evidence of indebtedness of the Company gives any
notice or takes any other action with respect to a claimed
default, the Company agrees to give notice within three (3)
Business Days of such event to all holders of the Debentures then
outstanding.
Section 7.3 Acceleration of Maturities.
When any Event of Default described in paragraph (a),
(b) or (c) of Section 7.1 has happened and is continuing, any
holder of any Debenture may, and when any Event of Default
described in paragraphs (d) through (i), inclusive, of said
Section 7.1 has happened and is continuing the holder or holders
of 50% or more of the principal amount of Debentures at the time
outstanding may, by notice to the Company, declare the entire
principal and all interest accrued on all Debentures to be, and
all Debentures shall thereupon become, forthwith due and payable,
without any presentment, demand, protest or other notice of any
kind, all of which are hereby expressly waived. When any Event
of Default described in paragraph (j) or (k) of Section 7.1 has
occurred, then all outstanding Debentures shall immediately
become due and payable without presentment, demand or notice of
any kind. Upon the Debentures becoming due and payable as a
result of any Event of Default as aforesaid, the Company will
forthwith pay to the holders of the Debentures the entire
principal and interest accrued on the Debentures. No course of
dealing on the part of any Debentureholder nor any delay or
failure on the part of any Debentureholder to exercise any right
shall operate as a waiver of such right or otherwise prejudice
such holder's rights, powers and remedies. The Company further
agrees, to the extent permitted by law, to pay to the holder or
holders of the Debentures all costs and expenses , including
reasonable attorneys' fees, incurred by them in the collection of
any Debentures upon any default hereunder or thereon.
ARTICLE VIII - RESTRICTIONS ON TRANSFER
Section 8.1 Legends; Restrictions on Transfer.
The Debenture has not been registered under the
Securities Act nor any state securities laws. Each Debenture
issued pursuant to this Agreement shall bear a legend in
substantially the following form:
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY
APPLICABLE STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED UNLESS
(i) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS, OR
(ii) IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE
COMPANY REGISTRATION UNDER THE SECURITIES ACT OR SUCH APPLICABLE
STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH
TRANSFER.
The provisions of this Article VIII shall be binding
upon all subsequent holders of the Debentures.
Section 8.2 Notice of Intention to Transfer; Opinions
of Counsel.
The Debentures shall not be transferable except upon
the conditions specified in this Article VIII. Each holder of
any Debenture, by acceptance thereof, agrees, prior to any
transfer of such Debenture, to give written notice to the Company
of such holder's intention to effect such transfer or conversion
and briefly describing the manner of the proposed transfer. Such
notice of intended transfer shall be accompanied by, if
applicable, a copy of the opinion of counsel to such holder
reasonably satisfactory to the Company, to the effect that
registration under the Securities Act of such Debenture, in
connection with such proposed transfer, is not required. If in
the opinion of such counsel, the proposed transfer of such
Debenture, may be effected without registration of such
Debenture, under the Securities Act, such holder shall be
entitled to transfer such Debenture in accordance with the terms
of the notice delivered by such holder to the Company. The
Company will promptly upon such transfer deliver new Debentures
not bearing a legend of the character set forth in Section 8.1,
unless in the opinion of such counsel subsequent disposition by
such holder may require registration under the Securities Act.
If the proposed transfer of such Debenture may not be affected
without registration of such Debenture under the Securities Act,
the holder thereof shall not be entitled to transfer such
Debenture in the absence of an effective registration statement.
ARTICLE IX - AMENDMENTS, WAIVERS AND CONSENTS
Section 9.1 Consent Required.
Any term, covenant, agreement or condition of this
Agreement may, with the consent of the Company, be amended or
compliance therewith may be waived (either generally or in a
particular instance and either retroactively or prospectively, if
the Company shall have obtained the consent in writing of the
holders of at least 50% in aggregate principal amount of
outstanding Debentures; provided that without the written consent
of the holders of all of the Debentures then outstanding, no such
waiver, modification, alteration or amendment shall be effective
(a) which will change the time of payment of the principal of or
the interest on any Debenture or reduce the principal amount
thereof or change the rate of interest thereon, (b) which will
change any of the provisions with respect to optional
prepayments, or (c) which will change the percentage of holders
of the Debentures required to consent to any such amendment,
modification or waiver of any of the provisions of this
Article VIII or Article VII.
Section 9.2 Solicitation of Debenture Holders.
The Company will not, directly or indirectly, pay or
cause to be paid by remuneration, whether by way of supplemental
or additional interest, fee or otherwise, to any holder of the
Debentures as consideration for or as an inducement to the
entering into by any holder of the Debentures of any waiver or
amendment of any of the terms and provisions of this Agreement
unless such remuneration is concurrently paid, on the same terms,
ratably to the holders of all of the Debentures then outstanding.
Section 9.3 Effect of Amendment or Waiver.
Any such amendment or waiver shall apply equally to all
of the holders of the Debentures and shall be binding upon them,
upon each future holder of any Debenture and upon the Company,
whether or not such Debenture shall have been marked to indicate
such amendment or waiver. No such amendment or waiver shall
extend to or affect any obligation not expressly amended or
waived or impair any right consequent thereon.
ARTICLE X - INTERPRETATION OF AGREEMENT; DEFINITIONS
Section 10.1 Definitions. Unless the context
otherwise requires, the terms hereinafter set forth when sued
herein shall have the following meanings and the following
definitions shall be equally applicable to both the singular and
plural forms of any of the terms herein defined:
"Affiliate" shall mean any Person (other than a
Restricted Subsidiary) (a) which directly or indirectly through
one or more intermediaries controls, or is controlled by, or is
under common control with, the Company, (b) which beneficially
owns or holds 5% or more of any class of the Voting Stock of the
Company or (c) 5% or more of the Voting Stock (or in the case of
a Person which is not a corporation, 5% or more of the equity
interest) of which is beneficially owned or held by the Company
or a Subsidiary. The term "control" means possession, directly
or indirectly, of the power to direct or cause the direction of
the management and policies of a Person, whether through the
ownership of Voting Stock, by contract or otherwise.
"Business Day" shall mean any day other than a
Saturday, Sunday, or other day on which banks in Tennessee are
authorized to close.
"Default" shall mean any event or condition, the
occurrence of which would, with the lapse of time or the giving
of notice, or both, constitute an Event of Default as defined in
Section 7.1.
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended and any successor statute of
similar import, together with the regulations thereunder, in each
case as in effect from time to time. References to sections of
ERISA shall be construed to also refer any successor sections.
"Event of Default" shall have the meaning set forth in
Section 7.1 hereof.
"Guaranties" by any Person shall mean all obligations
(other than endorsements in the ordinary course of business of
negotiable instruments for deposit or collection) of such Person
guaranteeing, or in effect guaranteeing, any Indebtedness,
dividend or other obligation of any other Person (the "primary
obligor") in any manner, whether directly or indirectly,
including, without limitation, all obligations incurred through
an agreement, contingent or otherwise, by such Person: (a) to
purchase such Indebtedness or obligation or any property or
assets constituting security therefor, (b) to advance or supply
funds (i) for the purchase or payment of such Indebtedness or
obligation, (ii) to maintain working capital or other balance
sheet condition or (iii) otherwise to advance or make available
funds for the purchase or payment of such Indebtedness or
obligation, or (c) to lease property or to purchase Securities or
other property or services primarily for the purpose of assuring
the owner of such Indebtedness or obligation of the ability of
the primary obligor to make payment of the Indebtedness or
obligation, or (d) otherwise to assure the owner of the
Indebtedness or obligation of the primary obligor against loss in
respect thereof. For the purposes of all computations made under
this Agreement, a Guaranty in respect of any Indebtedness for
borrowed money shall be deemed to be Indebtedness equal to the
principal amount of such Indebtedness for borrowed money which
has been guaranteed, and a Guaranty in respect of any other
obligation or liability or any dividend shall be deemed to be
Indebtedness equal to the maximum aggregate amount of such
obligation, liability or dividend.
"Hazardous Substance" shall mean any hazardous or toxic
material, substance or waste, pollutant or contaminant which is
regulated under any statute, law, ordinance, rule or regulation
of any local, state, regional or Federal authority having
jurisdiction over the property of the Company and its
Subsidiaries or its use, including but not limited to any
material, substance or waste which is: (a) defined as a
hazardous substance under Section 311 of the Federal Water
Pollution Control Act (33 U.S.C. Section 1317.1) as amended;
(b) regulated as a hazardous waste under Section 1004 or
Section 3001 of the Federal Solid Waste Disposal Act, as amended
by the Resource Conservation and Recovery Act (42 U.S.C. Section 6901
et seq.) as amended; (c) defined as a hazardous substance under
Section 101 of the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) as
amended; or (d) defined or regulated as a hazardous substance or
hazardous waste under any rules or regulations promulgated under
any of the foregoing statutes.
"Indebtedness" of any Person shall mean and include all
obligations of such Person which in accordance with generally
accepted accounting principles shall be classified upon a balance
sheet of such Person as liabilities of such Person, and in any
event shall include all (a) obligations of such Person for
borrowed money or which have been incurred in connection with the
acquisition of property or assets, (b) obligations secured by any
lien or other charge upon property or assets owned by such
Person, even though such Person has not assumed or become liable
for the payment of such obligations, (c) obligations created or
arising under any conditional sale or other title retention
agreement with respect to property acquired by such Person,
notwithstanding the fact that the rights and remedies of the
seller, lender or lessor under such agreement in the Event of
Default are limited to repossession or sale or property,
(d) capitalized rentals, and (e) Guaranties of obligations of
others of the character referred to in this definition.
"Interest Charges" for any period shall mean all
interest and all amortization of debt discount and expense on any
particular Indebtedness for which such calculations are being
made. Computations of Interest Charges on a pro forma basis for
Indebtedness having a variable interest rate shall be calculated
at the rate in effect on the date of any determination.
"Investments" shall mean all investments, in cash or by
delivery of property made, directly or indirectly in any Person,
whether by acquisition of shares of capital stock, indebtedness
or other obligations or Securities or by loan, advance, capital
contribution or otherwise; provided, however that "Investments"
shall not mean or include routine investments in property to be
used or consumed in the ordinary course of business.
"Long-Term Lease" shall mean any lease of real or
personal property (other than a Capitalized Lease) having an
original term, including any period for which the lease may be
renewed or extended at the option of the lessor, of more than
three years.
"Material Adverse Event" shall mean any event or
circumstance, or set of events or circumstances, individually or
collectively, that reasonably could be expected to result in any
(i) adverse effect upon the validity or enforceability of any of
the Operative Documents, or (ii) material and adverse effect on
the financial condition of the Company as represented to
Purchaser herein or in any document delivered to Purchaser in
connection herewith, or (iii) default or potential default under
any of the Operative Documents.
"Multiemployer Plan" shall have the same meaning as in
ERISA.
"Person" shall mean an individual, partnership,
corporation, trust or unincorporated organization, and a
government or agency or political subdivision thereof.
"Plan" means a "pension plan", as such term is defined
in ERISA, established or maintained by the Company or any ERISA
Affiliate or as to which the Company or any ERISA Affiliate
contributed or is a member or otherwise may have any liability.
"Reportable Event" shall have the same meaning as in
ERISA.
"Restricted Investments" shall mean all Investments,
other than Investments described in clauses (i) through (iv) of
Section 5.17 hereof.
"Security" shall have the same meaning as in Section
2(1) of the Securities Act of 1933, as amended.
"Subsidiary" shall mean, as to any particular parent
corporation, any corporation of which more than 50% (by number of
votes) of the Voting Stock shall be owned by such parent
corporation and/or one or more corporations which are themselves
Restricted Subsidiaries of such parent corporation. The term
"Subsidiary" shall mean a Subsidiary of the Company.
"Voting Stock" shall mean Securities of any class or
classes the holders of which are ordinarily, in the absence of
contingencies, entitled to elect a majority of the corporate
directors (or Persons performing similar functions).
"Wholly-owned" when used in connection with any
Subsidiary shall mean a Subsidiary of which all of the issued and
outstanding shares of stock (except shares required as directors'
qualifying shares) and all Funded Debt or Current Debt shall be
owned by the Company and/or one or more of its Wholly-owned
Restricted Subsidiaries.
Section 10.2 Accounting Principles.
Where the character or amount of any asset or liability
or item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be
made for the purposes of this Agreement, the same shall be done
in accordance with GAAP, to the extent applicable, except where
such principles are inconsistent with the requirements of this
Agreement.
Section 10.3 Directly or Indirectly.
Where any provision in this Agreement refers to action
to be taken by any Person, or which such Person is prohibited
from taking such provision shall be applicable whether the action
in question is taken directly or indirectly by such Person.
ARTICLE XI - MISCELLANEOUS
Section 11.1 Expenses, Stamp Tax Indemnity.
Whether or not the transactions herein contemplated
shall be consummated, the Company agrees to pay directly all of
Purchaser's out-of-pocket expenses in connection with the
entering into of this Agreement and the consummation of the
transactions contemplated hereby, including but not limited to
the reasonable fees, expenses and disbursements of Sherrard &
Roe, PLC, Purchaser's counsel, the entering into of this
Agreement and the consummation of duplicating and printing cost
and charges for shipping the Debentures, adequately insured to
Purchaser at Purchaser's home office or at such other place as
Purchaser may designate, and so long as Purchaser hold any of the
Debentures, all such expenses relating to any amendments, waivers
or consents pursuant to the provisions hereof (whether or not the
same are actually executed and delivered), including, without
limitation, any amendments, waivers or consents resulting from
any work-out, restructuring or similar proceedings relating to
the performance by the Company of its obligations under this
Agreement and the Debentures. The Company also agrees that it
will pay and save Purchaser harmless against any and all
liability with respect to stamp and other taxes, if any, which
may be payable in connection with the execution and delivery of
this Agreement or the Debentures, whether or not any Debentures
are then outstanding. The Company agrees to protect and
indemnify Purchaser against any liability for any and all
brokerage fees and commissions payable or claimed to be payable
to any Person in connection with the transactions contemplated by
this Agreement.
Section 11.2 Powers and Rights Not Waived; Remedies
Cumulative.
No delay or failure on the part of the holder of any
Debenture in the exercise of any power or right shall operate as
a waiver thereof; nor shall any single or partial exercise of the
same preclude any other of further exercise thereof, or the
exercise of any other power or right, and the rights and remedies
of the holder of any Debenture are cumulative to and are not
exclusive of any rights or remedies any such holder would
otherwise have, and no waiver or consent, given or extended
pursuant to Article VIII hereof, shall extend to or affect any
obligation or right not expressly waived or consented to.
Section 11.3 Notices.
All communications provided for hereunder shall be in
writing and shall be delivered personally, or mailed by
registered mail, or by prepaid overnight air courier, or by
facsimile communication, in each case addressed:
If to Purchaser: Tandem Capital, Inc.
500 Church Street
Suite 200
Nashville, Tennessee 37219
Fax: (615) 726-1208
Attention: Craig Macnab
with a copy to: Sherrard & Roe, PLC
424 Church Street, Suite 2000
Nashville, TN 37219
Fax: (615) 742-4539
Attention: Donald I.N. McKenzie, Esq.
If to the Company: Environmental Tectonics Corporation
125 James Way
Southampton, PA 18966-3877
Fax: (215) 357-4000
Attention: William F. Mitchell
with a copy to: Stevens & Lee, A Professional
Corporation
One Glenhardie Corporate Center
1275 Drummers Lane
P.O. Box 236
Wayne, PA 19087-1236
Fax: (610) 687-1384
Attention: Jeffrey P. Waldron, Esq.
or such other address as Purchaser or the subsequent holder of
any Debenture initially issued to Purchaser may designate to the
Company in writing, or such other address as the Company may in
writing designate to Purchaser or to a subsequent holder of the
Debenture initially issued to Purchaser, provided, however, that
a notice sent by overnight air courier shall only be effective if
delivered at a street address designated for such purpose by such
person and a notice sent by facsimile communication shall only be
effective if made by confirmed transmission at a telephone number
designated for such purpose by such person or, in either case, as
Purchaser or a subsequent holder of any Debentures initially
issued to Purchaser may designate to the Company in writing or at
a telephone number herein set forth in the case of the Company.
Section 11.4 Successors and Assigns.
This Agreement, the Debentures and the other Operative
Documents may be endorsed, assigned and/or transferred in whole
or in part by Purchaser, and any such holder and/or assignee of
the same shall succeed to and be possessed of the rights and
powers of Purchaser under all of the same to the extent
transferred and assigned. The Company shall not assign any of
its rights nor delegate any of its duties under this Agreement or
any of the other Operative Documents by operation of law or
otherwise without the prior express written consent of Purchaser,
and in the event the Company obtains such consent, this Agreement
and the other Operative Documents shall be binding upon such
assignee.
Section 11.5 Survival of Covenants and
Representations.
All covenants, representations and warranties made by
the Company herein and in any certificates delivered pursuant
hereto, whether or not in connection with the Closing Date, shall
survive the closing and the delivery of this Agreement and the
Debentures.
Section 11.6 Severability.
Should any part of this Agreement for any reason be
declared invalid or unenforceable, such decision shall not affect
the validity of any remaining portion, which remaining portion
shall remain in force and effect as if this Agreement had been
executed with the invalid or unenforceable portion thereof
eliminated and it is hereby declared the intention of the parties
hereto that they would have executed the remaining portion of
this Agreement without including therein any such part, parts or
portion which may for any reason, be hereafter declared invalid
or unenforceable.
Section 11.7 Governing Law.
This agreement and the Debentures issued and sold
hereunder shall be governed by and construed in accordance with
Tennessee law, without regard to its conflict of law rules.
Section 11.8 Captions; Counterparts.
The descriptive headings of the various Sections or
parts of this Agreement are for convenience only and shall not
affect the meaning or construction of any of the provisions
hereof. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
* * *
IN WITNESS WHEREOF, the parties hereto have caused this
Debenture Purchase Agreement to be executed and delivered by
their duly authorized officers as of the date first written
above.
COMPANY: ENVIRONMENTAL TECTONICS
CORPORATION:
By:/s/ Duane Deaner
Duane Deaner
Chief Financial Officer
PURCHASER: SIRROM CAPITAL CORPORATION
By:/s/ Craig Macnab
Name: Craig Macnab
Title: Vice President
Exhibit 10.8
PREFERRED STOCK PURCHASE AGREEMENT
OF
SIRROM CAPITAL CORPORATION
AND
ENVIRONMENTAL TECTONICS CORPORATION
<PAGE>
Table of Contents
ARTICLE I. - SALE AND PURCHASE OF STOCK
Section 1.1. Description of Preferred Stock.................. 1
Section 1.2. Commitment; Closing Date........................ 1
Section 1.3. Processing Fee.................................. 2
ARTICLE II. - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 2.1. Corporate Status................................ 2
Section 2.2. Capitalization.................................. 3
Section 2.3. Authorization................................... 4
Section 2.4. Validity and Binding Effect..................... 5
Section 2.5. Contracts and Other Commitments................. 5
Section 2.6. Litigation...................................... 5
Section 2.7. Financial Statements............................ 5
Section 2.8. SEC Reports..................................... 6
Section 2.9. Absence of Changes.............................. 6
Section 2.10. No Defaults.................................... 7
Section 2.11. Compliance With Law............................ 7
Section 2.12. Taxes.......................................... 7
Section 2.13. Certain Transactions........................... 8
Section 2.14. Title to Property.............................. 8
Section 2.15. Intellectual Property.......................... 8
Section 2.16. Accounting Matters............................. 9
Section 2.17. Distributions to Company....................... 10
Section 2.18. Prior Sales.................................... 10
Section 2.19. Regulatory Compliance.......................... 10
Section 2.20. Registration Rights............................ 10
Section 2.21. Environment.................................... 10
Section 2.22. Insurance...................................... 11
Section 2.23. Governmental Consents.......................... 11
Section 2.24. Offering....................................... 12
Section 2.25. Manufacturing Rights........................... 12
Section 2.26. Employees...................................... 12
Section 2.27. Fees/Commissions............................... 13
Section 2.28. 1940 Act Compliance............................ 13
Section 2.29. ERISA.......................................... 13
Section 2.30. Disclosure..................................... 14
Section 2.31. Survival...................................... 14
ARTICLE III. - REPRESENTATIONS AND WARRANTIES OF PURCHASER
Section 3.1. Authorization................................... 14
Section 3.2. Validity and Binding Effect..................... 14
Section 3.3. Accredited Investor Status; Purchase for
Investment.................................................... 15
Section 3.4. Survival........................................ 15
<PAGE>
ARTICLE IV. - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
PURCHASER
Section 4.1. Representations and Warranties................. 16
Section 4.2. Officer's Certificate.......................... 16
Section 4.3. Satisfactory Proceedings....................... 16
Section 4.4. Statement With Respect to Shares............... 16
Section 4.5. Registration Rights Agreement.................. 16
Section 4.6. Sale of Subordinated Debentures................ 17
Section 4.7. Closing of FUNB Financing...................... 17
Section 4.8. Legal Opinion.................................. 17
Section 4.9. The Company's Existence and Authority.......... 17
Section 4.10. Required Consents............................. 17
Section 4.11. Waiver of Conditions.......................... 18
ARTICLE V. - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE
COMPANY
Section 5.1. Representations and Warranties................. 18
Section 5.2. Qualifications................................. 18
ARTICLE VI. - COVENANTS OF COMPANY
Section 6.1. Use of Proceeds................................ 18
Section 6.2. Repurchase of Preferred Stock.................. 18
Section 6.3. Corporate Existence, Etc....................... 19
Section 6.4. Maintenance, Etc............................... 19
Section 6.5. Nature of Business............................. 19
Section 6.6. Insurance...................................... 19
Section 6.7. Taxes, Claims for Labor and Materials.......... 19
Section 6.8. Compliance with Laws........................... 20
Section 6.9. ERISA Matters.................................. 20
Section 6.10. Books and Records; Rights of Inspection....... 20
Section 6.11. Reports....................................... 21
Section 6.12. [Reserved].................................... 22
Section 6.13. Board of Directors; Observer Rights........... 22
Section 6.14. [Reserved].................................... 23
ARTICLE VII. - AMENDMENTS, WAIVERS AND CONSENTS
Section 7.1. Consent Required............................... 23
Section 7.2. Effect of Amendment or Waiver.................. 23
ARTICLE VIII. - INTERPRETATION OF AGREEMENT; DEFINITIONS
Section 8.1. Definitions.................................... 23
Section 8.2. Accounting Principles.......................... 24
Section 8.3. Directly or Indirectly......................... 24
ARTICLE IX. - MISCELLANEOUS
Section 9.1. Expenses, Stamp Tax Indemnity.................. 24
Section 9.2. Powers and Rights Not Waived; Remedies
Cumulative................................................... 25
Section 9.3. Notices........................................ 25
Section 9.4. Successors and Assigns......................... 26
Section 9.5. Survival of Covenants and Representations...... 26
Section 9.6. Severability................................... 27
Section 9.7. Governing Law.................................. 27
Section 9.8. Captions; Counterparts......................... 27
Section 9.9. Entire Agreement............................... 27
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
This PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement")
entered into the 27th day of March, 1997, is by and between
ENVIRONMENTAL TECTONICS CORPORATION, a Pennsylvania corporation
(the "Company") and SIRROM CAPITAL CORPORATION, a Tennessee
corporation (the "Purchaser").
W I T N E S S E T H:
WHEREAS, the Company desires to obtain additional capital
for use in connection with its business through the issue and
sale of certain obligations of the Company, and Purchaser is
willing to purchase such obligations of the Company, on the terms
and conditions set forth herein.
NOW, THEREFORE, in mutual consideration of the premises and
the respective representations, warranties, covenants and
agreements contained herein, the parties agree as follows:
ARTICLE I. - SALE AND PURCHASE OF STOCK
Section 1.1. Description of Preferred Stock.
The Company has authorized the issue and sale of 25,000
shares of its Series A Convertible Preferred Stock (the
"Preferred Stock") having the rights and preferences set forth in
the Company's Statement With Respect to Shares attached as
Exhibit A (the "Statement With Respect to Shares") hereto for a
purchase price of $100 per share, or an aggregate purchase price
of $2,500,000.00. The Statement With Respect to Shares shall be
filed with the Secretary of State of Pennsylvania on or before
the Closing Date (as defined below). The terms which are
capitalized herein shall have the meanings set forth in Section 8
hereof unless the context shall otherwise require.
Section 1.2. Commitment; Closing Date.
Subject to the terms and conditions hereof and on the basis
of the representations and warranties hereinafter set forth, the
Company agrees to issue and sell to Purchaser, and Purchaser
agrees to purchase from the Company, 25,000 shares of Preferred
Stock for an aggregate purchase price of $2,500,000.
Delivery of a single certificate representing the Preferred
Stock will be made at the offices of Sherrard & Roe, PLC,
424 Church Street, Suite 2000, Nashville, Tennessee 37219,
against payment therefor by federal funds wire transfer in
immediately available funds and to the accounts and in the
amounts in accordance with the Company's wire instructions set
forth on Exhibit B hereto, at 10:00 A.M., Nashville time, on
March 27, 1997 or such later date as the Company and Purchaser
shall agree (the "Closing Date"). The stock certificate to be
delivered to Purchaser on the Closing Date will be registered in
Purchaser's name or in the name of such nominee as Purchaser may
specify at least 24 hours prior to the date fixed for delivery.
Section 1.3. Processing Fee.
The Company agrees to pay to Purchaser on or before the
Closing Date a processing fee in an amount equal to $50,000.
ARTICLE II. - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchaser as
follows:
Section 2.1. Corporate Status.
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has the corporate power to own
and operate its properties, to carry on its business as now
conducted and to enter into and to perform its obligations under
this Agreement, the Registration Rights Agreement between the
Company and Purchaser dated of even date herewith (the
"Registration Rights Agreement") and any other document executed
and delivered by Purchaser in connection herewith or therewith
(collectively, the "Operative Documents"). The Company is
qualified to do business and is in good standing in each state or
other jurisdiction in which such qualification is necessary under
applicable provisions of law; except where the failure to so
qualify would not have a material adverse effect on the financial
condition or result of operations of the Company. The states or
other jurisdictions in which the Company is so qualified are set
forth on Schedule 2.1(a) hereto. A certified charter of the
Company and a good standing certificate for each state in which
it is qualified to do business are attached to Schedule 2.1(a).
(b) Schedule 2.1(b) sets forth a complete list of each
corporation, partnership, joint venture, limited liability
company or other business organization in which the Company owns,
directly or indirectly, any capital stock or other equity
interest (the "Subsidiary" or, collectively, the "Subsidiaries"),
or with respect to which the Company or any Subsidiary, alone or
in combination with others, is in a control position, which list
shows the jurisdiction of incorporation or other organization and
the percentage of stock or other equity interest of each
Subsidiary owned by the Company. Each Subsidiary is duly
organized, validly existing and in good standing under the laws
of the jurisdiction of incorporation or other organization as
indicated on Schedule 2.1(b), each has all requisite power and
authority and holds all material licenses, permits and other
required authorizations from government authorities necessary to
own its properties and assets and to conduct its business as it
is now being conducted, and is qualified to do business as a
foreign corporation (or business organization) and is in good
standing in every jurisdiction in which such qualification is
necessary under applicable provisions of law; except where the
failure to so qualify would not have a material adverse effect on
the financial condition or results of operations of the company.
All of the outstanding shares of capital stock, or other equity
interest, of each Subsidiary owned, directly or indirectly, by
the Company have been validly issued, are fully paid and
nonassessable, and are owned by the Company free and clear of all
liens, charges, security interests or encumbrances. A certified
charter for each Subsidiary and good standing certificates for
each of the states in which each Subsidiary is qualified to do
business are attached to Schedule 2.1(b).
(c) Schedule 2.1(c) sets forth a complete list of
"affiliates," of the Company as that term is defined in Rule 405
of Regulation C adopted under the Securities Act of 1933, as
amended (the "Securities Act"), with a brief statement describing
the basis of each affiliation.
Section 2.2. Capitalization.
(a) The authorized capital stock of the Company
consists of (i) 10,000,000 shares of common stock, par value $.10
per share, of which 2,962,784 shares are issued and outstanding,
and (ii) 1,000,000 shares of undesignated preferred stock, with
rights and preferences to be fixed by the Board of Directors in
accordance with the corporate laws of the Commonwealth of
Pennsylvania and the Company's Articles of Incorporation, and of
which, as of the Closing, 25,000 shall have been designated as
"Series A Convertible Preferred Stock," bearing the rights,
preferences and limitations set forth in the Statement With
Respect to Shares and none of which are outstanding. All shares
of Common Stock outstanding have been validly issued and are
fully paid and nonassessable. There are no statutory or
contractual pre-emptive rights, rights of first refusal,
antidilution rights or any similar rights held by any party with
respect to the issuance of the Preferred Stock. The offer, sale
and issuance of the Preferred Stock do not require registration
under the Securities Act or any applicable state securities laws.
(b) The Company has not granted, or agreed to grant or
issue, any options, warrants or rights to purchase or acquire
from the Company any shares of capital stock of the Company, and
there are no securities outstanding which are convertible into or
exchangeable for shares of Common Stock, or contracts,
commitments, agreements, understandings, arrangements or
restrictions as to which the Company is a party, or by which it
is bound, relating to any shares of capital stock or other
securities of the Company, whether or not outstanding except for
(i) the conversion privileges of the Preferred Stock to be issued
pursuant to this Agreement, with respect to which 416,666.67
shares of Common Stock have been reserved for issuance upon
conversion, (ii) 314,164 shares of Common Stock reserved for
issuance pursuant to the Company's 1988 Stock Option Plan, for
which options to purchase 99,010 shares are outstanding, (iii) a
warrant to acquire 100,000 shares of Common Stock held by Chase
Manhattan Capital Corporation, and (iv) the obligation to issue
to Osprey Partners, in certain circumstances, a warrant to
purchase 125,000 shares of Common Stock. Schedule 2.2 sets forth
a summary of such options, warrants and other rights to acquire
capital stock of the Company.
(c) The Preferred Stock that is being purchased by the
Purchaser, when issued, sold, and delivered in accordance with
the terms of this Agreement for the consideration expressed
herein, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other
than restrictions on transfer under this Agreement and under
applicable state and federal securities laws. The Common Stock
issuable upon conversion of the Preferred Stock being purchased
under this Agreement has been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the
Statement With Respect to Shares and this Agreement, will be duly
and validly issued, fully paid, and nonassessable and will be
free of restrictions on transfer other than restrictions on
transfer under this Agreement and under applicable state and
federal securities laws.
Section 2.3. Authorization.
The Company has full legal right, power and authority to
enter into and perform its obligations under this Agreement and
any of the other Operative Documents, without the consent or
approval of any other person, firm, governmental agency or other
legal entity. The execution and delivery of this Agreement and
the Operative Documents, the issuance of the Preferred Stock
hereunder, the execution and delivery of each other document in
connection herewith or therewith to which the Company is a party,
and the performance by the Company of its obligations hereunder
and/or thereunder are within the corporate powers of the Company
and have been duly authorized by all necessary corporate action
properly taken, have received all necessary governmental
approvals, if any were required. The consummation of the
transactions contemplated by this Agreement and the fulfillment
of the terms hereof do not and will not contravene or conflict
with the Articles of Incorporation or Bylaws of the Company or
any material agreement to which the Company or any of its
Subsidiaries is now a party or by which any of them or their
properties is bound, or constitute a default thereunder; or
results in the creation or imposition of any lien, charge,
security interest, or encumbrance of any nature upon any of the
property or assets of the Company or any of its Subsidiaries
pursuant to the terms of any such agreement or instrument; or
violates any provision of law or any applicable judgment,
ordinance, regulation or order of any court or governmental
agency. The officer(s) executing this Agreement, the Operative
Documents and any other document executed and delivered by
Purchaser in connection herewith or therewith, is duly authorized
to act on behalf of the Company.
Section 2.4. Validity and Binding Effect.
Each of the Operative Documents is the legal, valid and
binding obligation of the Company, enforceable against the
Company in accordance with its terms.
Section 2.5. Contracts and Other Commitments.
Except as disclosed on Schedule 2.5, the Company and its
Subsidiaries do not have and are not bound by any contract,
agreement, lease, commitment, loans, liens, pledges, security
interests upon which the Company or any Subsidiary is obligated
or by which the Company is bound other than (i) contracts for the
purchase of supplies and services that were entered into in the
ordinary course of business and that do not involve more than
$50,000, and do not extend for more than one (1) year beyond the
date hereof, (ii) sales contracts entered into in the ordinary
course of business, and (iii) contracts terminable at will by the
Company on more than thirty (30) days' notice without cost or
liability to the Company and that do not involve any employment
or consulting arrangement and are not material to the conduct of
the Company's business. Consummation of the transactions hereby
contemplated and the performance of the obligations of the
Company under and by virtue of the Operative Documents will not
result in any breach of, or constitute a default under, any
material mortgage, security deed or agreement, deed of trust,
lease, bank loan or credit agreement, or any corporate articles,
certificate or bylaws, agreement or certificate of limited
partnership, partnership agreement, limited liability company
agreement, license, franchise or any other material instrument or
agreement to which the Company is a party or by which the Company
or its properties may be bound or, to the knowledge or the
Company, affected or to which the Company has not obtained an
effective waiver.
Section 2.6. Litigation.
Except as set forth on Schedule 2.6, there is no litigation,
arbitration, claim, proceeding or investigation pending or
threatened in writing in which the Company or any Subsidiary is a
party or to which any of its respective properties or assets is
the subject which, if determined adversely to the Company or such
Subsidiary, would individually or in the aggregate have a
material adverse effect on the financial position, results of
operations or business of the Company and its Subsidiaries, taken
as a whole.
Section 2.7. Financial Statements.
The consolidated financial statements of the Company and its
Subsidiaries for the fiscal years ended February 25, 1994,
February 24, 1995, and February 23, 1996, and the unaudited
consolidated financial statements as of the nine (9) months ended
November 29, 1996, which the Company previously has heretofore
delivered to Purchaser, fairly present the financial condition of
the Company and its Subsidiaries as at the effective dates of and
for the periods referred to in such financial statements and have
been prepared in accordance with generally accepted accounting
principles ("GAAP") consistently followed throughout the periods
involved. The consolidated balance sheets and the related notes
fairly present the financial condition of the Company and its
consolidated Subsidiaries as of the respective dates thereof, and
the consolidated statements of income, cash flows and changes in
stockholders' equity and the related notes fairly present the
results of operations of the Company and its consolidated
Subsidiaries for the respective periods indicated. There has
been no material adverse change in the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole
since November 29, 1996.
Section 2.8. SEC Reports.
The Company's Common Stock is listed on the American Stock
Exchange and has been duly registered with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended (the "Exchange Act")]. Since February 26, 1993,
the Company has filed all reports, registrations, proxy or
information statements and all other documents, together with any
amendments required to be made thereto, required to be filed with
the SEC under the Securities Act and the Exchange Act
(collectively, the "SEC Reports"). Since February 26, 1995, the
Company has timely filed all SEC Reports. The financial
statements contained in the SEC Reports fairly presented the
financial position of the Company as of the dates mentioned and
the results of operations, changes in stockholders' equity and
changes in financial position or cash flows for the periods then
ended in conformity with GAAP applied on a consistent basis
throughout the periods involved. The Company previously has
furnished to Purchaser true copies of all the SEC Reports,
together with all exhibits thereto that Purchaser has requested.
As of their respective dates, the SEC Reports complied (or will
comply, as the case may be) in all material respects with all
rules and regulations promulgated by the SEC and did not (or will
not, as the case may be) contain any untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading.
Section 2.9. Absence of Changes.
Since November 29, 1996, (i) neither the Company nor any of
its Subsidiaries have incurred any liabilities or obligations,
direct or contingent, or entered into any transactions, not in
the ordinary course business, that are material to the Company,
(ii) neither the Company nor any of its Subsidiaries have
purchased any of its outstanding capital stock or declared, paid
or otherwise made any dividend or distribution of any kind on its
capital stock, (iii) there has not been any change in the capital
stock, long-term debt or short-term debt of the Company, and
(iv) there has not been any material adverse change, or any
development involving a prospective material adverse change, in
or affecting the condition (financial or otherwise), results of
operations, business or prospects of the Company or any
Subsidiary, taken as a whole.
Section 2.
Except as set forth on Schedule 2.10 and except where a
default or event of default does not and would not constitute a
Material Adverse Event, no default or event of default by the
Company or any Subsidiary exists under this Agreement or any of
the other Operative Documents, or under any other instrument or
agreement to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary or its respective properties
may be bound or, to the knowledge of the Company, affected, and
no event has occurred and is continuing that with notice or the
passage of time or both would constitute a default or event of
default thereunder.
Section 2.11. Compliance With Law.
To the Company's knowledge, the Company is in compliance
with all laws, regulations, decrees and orders applicable to it
(including but not limited to laws, regulations, decrees and
orders relating to environmental, occupational and health
standards and controls, antitrust, monopoly, restraint of trade
or unfair competition) to the extent that noncompliance, in the
aggregate, cannot reasonably be expected to cause a Material
Adverse Event.
Section 2.12. Taxes.
Except as set forth on Schedule 2.12, the Company and its
Subsidiaries have filed or caused to be filed all federal, state
and local income, excise and franchise tax returns required to be
filed (except for returns that have been appropriately extended),
and has paid, or provided for the payment of, all taxes shown to
be due and payable on said returns and all other taxes,
impositions, assessments, fees or other charges imposed on it by
any governmental authority, agency or instrumentality, prior to
any delinquency with respect thereto (other than taxes,
impositions, assessments, fees and charges currently being
contested in good faith by appropriate proceedings, for which
appropriate amounts have been reserved), and the Company does not
know of any proposed assessment for additional taxes or any basis
therefor. No tax liens have been filed against the Company or
any of its properties. The Company's federal income tax
liability has been finally determined by the Internal Revenue
Service and satisfied for all taxable years up to and including
the taxable year ended February 24, 1995 or closed by applicable
statutes of limitation.
Section 2.13. Certain Transactions.
Except as set forth on Schedule 2.13(i) and except as to
indebtedness incurred in the ordinary course of business and
approved by the Board of Directors of the Company, neither the
Company nor any Subsidiary is indebted, directly or indirectly,
to any of its officers or directors, or to their respective
spouses or children, in excess of an aggregate amount of $60,000,
and none of the officers or directors or any members of their
immediate families are indebted to the Company or any Subsidiary
in excess of an aggregate amount of $60,000 or have any direct or
indirect ownership interest in any firm or corporation with which
the Company or any Subsidiary is affiliated or with which the
Company has a business relationship, or any firm or corporation
which competes with the Company or any Subsidiary, except that
officers and/or directors of the Company may own no more than 1%
of the outstanding stock of any publicly traded company which
competes directly with the Company. Except as set forth on
Schedule 2.13(ii), no officer or director of the Company or any
Subsidiary or any member of their immediate families is, directly
or indirectly, interested in any material contract with the
Company. Except as set forth on Schedule 2.13(iii), neither the
Company nor any Subsidiary is a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation.
Section 2.14. Title to Property.
The Company and each Subsidiary has good and marketable
title to all of real and material personal property owned by it,
free and clear of all liens, security interests, pledges,
encumbrances, equities claims and restrictions of every kind and
nature whatsoever, except as disclosed on Schedule 2.14 and
except for such liens, security interests, pledges, encumbrances,
equities claims and restrictions which are not in the aggregate
material to the business, operations or financial condition of
the Company and its Subsidiaries taken as a whole. Any real
property and buildings held under lease by the Company or any
Subsidiary are held under valid existing and enforceable leases,
except as disclosed on Schedule 2.14 or which are not material
and do not interfere with the use to be made of such buildings or
property by the Company.
Section 2.15. Intellectual Property.
Except as set forth in Schedule 2.15, the Company is the
lawful owner or has a valid right to use the of its proprietary
information used in its business free and clear of any claim,
right, trademark, patent or copyright protection of any third
party. As used herein, "proprietary information" includes
without limitation (i) any computer software and related
documentation, inventions, technical and nontechnical data
related thereto, and (ii) other documentation, inventions and
data related to patterns, plans, methods, techniques, drawings,
finances, customer lists, suppliers, products, special pricing
and cost information, designs, processes, procedures, formulas,
research data owned or used by the Company or any Subsidiary or
marketing studies conducted by the Company, all of which the
Company considers to be commercially important and competitively
sensitive and which generally has not been disclosed to third
parties other than customers in the ordinary course of business.
Except as set forth in Schedule 2.15, the Company has good and
marketable title or has a valid right to use to all patents,
trademarks, trade names, service marks, copyrights or other
intangible property rights, and registrations or applications for
registration thereof, owned by the Company or any Subsidiary or
used or required by the Company or any Subsidiary in the
operation of its business as presently being conducted. The
Company has no knowledge of any infringements or conflict with
asserted rights of others with respect to copyrights, patents,
trademarks, service marks, trade names, trade secrets or other
intangible property rights or know-how which could cause a
material adverse event. To the Company's knowledge, no products
or processes of the Company infringe or conflict with any rights
of patent or copyright, or any discovery, invention product or
process, that is the subject of a patent or copyright application
or registration known to the Company. The Company follows such
procedures as the Board of Directors of the Company deem
necessary or appropriate to provide reasonable protection of the
Company's trade secrets and proprietary rights in intellectual
property of all kinds. To the knowledge of the Company, no
person employed by or affiliated with the Company has employed or
proposes to employ any trade secret or any information or
documentation proprietary to any former employer, and to the
knowledge of the Company, no person employed by or affiliated
with the Company has violated any confidential relationship that
such person may have had with any third person, in connection
with the development, manufacture or sale of any product or
proposed product or the development or sale of any service or
proposed service of the Company.
Section 2.16. Accounting Matters.
The Company and each of its Subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions
are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting
principles and to maintain assets accountability for the assets
of the Company and each of its Subsidiaries; (iii) access to the
assets of the Company and each of its Subsidiaries are permitted
only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets of
the Company and each of its Subsidiaries are compared with the
existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
Section 2.17. Distributions to Company.
No Subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company,
from making any other distributions on such Subsidiary's capital
stock, from repaying to the Company any loans or advances to such
Subsidiary or from transferring any of such Subsidiary's property
or assets to the Company or any other Subsidiary of the Company.
Section 2.18. Prior Sales.
All offers and sales of the Company's capital stock prior
to the date hereof were at all relevant times (i) exempt from the
registration requirements of the Securities Act or were
registered under the Securities Act, and (ii) duly registered or
were the subject of an available exemption from the requirements
of all applicable state securities or Blue Sky laws.
Section 2.19. Regulatory Compliance.
Except as set forth on Schedule 2.19, the conduct of the
business of the Company is not (and is not intended to be, as
hereinafter conducted) dependent on any license, permit or other
authorization of any federal, state or local regulatory body, and
except as set forth on Schedule 2.19, such business is not
subject to the regulation of any federal, state or local
government regulatory body by reason of the nature of the
business being conducted. All licenses, permits and
authorizations set forth on Schedule 2.19 are in full force and
effect.
Section 2.20. Registration Rights.
Except as described in Schedule 2.20, the Company is not
under any obligation to register under the Securities Act or the
Trust Indenture Act of 1939, as amended, any of its presently
outstanding securities or any of its securities that may
subsequently be issued.
Section 2.21. Environment.
The Company has duly complied in all material respects with,
and its business, operations, assets, equipment, property,
leaseholds or other facilities are in compliance in all material
respects with the provisions of all federal, state and local
environmental, health, and safety laws, codes and ordinances, and
all rules and regulations promulgated thereunder. The Company
has been issued and will maintain all required federal, state and
local permits, licenses, certificates and approvals relating to
(1) air emissions; (2) discharges to surface water or
groundwater; (3) noise emissions; (4) solid or liquid waste
disposal; (5) the use, generation, storage, transportation or
disposal of toxic or hazardous substances or wastes (which shall
include any and all such materials listed in any federal, state
or local law, code or ordinance and all rules and regulations
promulgated thereunder as hazardous or potentially hazardous); or
(6) other environmental, health or safety matters. The Company
has not received notice of, or knows of, or suspects facts which
might constitute a material violation of any federal, state or
local environmental, health or safety laws, codes or ordinances,
and any rules or regulations promulgated thereunder with respect
to its businesses, operations, assets, equipment, property,
leaseholds, or other facilities. Except in accordance with a
valid governmental permit, license, certificate or approval,
there has been no material emission, spill, release or discharge
into or upon (1) the air; (2) soils, or any improvements located
thereon; (3) surface water or groundwater; or (4) the sewer,
septic system or waste treatment, storage or disposal system
servicing the premises, of any toxic or hazardous substances or
wastes at or from the premises. There has been no complaint,
order, directive, claim, citation or notice by any governmental
authority or any person or entity with respect to (1) air
emissions; (2) spills, releases or discharges to soils or
improvements located thereon, surface water, groundwater or the
sewer, septic system or waste treatment, storage or disposal
systems servicing the premises; (3) noise emissions; (4) solid or
liquid waste disposal; (5) the use, generation, storage,
transportation or disposal of toxic or hazardous substances or
waste; or (6) other environmental, health or safety matters
affecting the Company or its business, operations, assets,
equipment, property, leaseholds or other facilities. The Company
does not have any indebtedness, obligation or liability (absolute
or contingent, matured or not matured), with respect to the
storage, treatment, cleanup or disposal of any solid wastes,
hazardous wastes or other toxic or hazardous substances
(including without limitation any such indebtedness, obligation,
or liability with respect to any current regulation, law or
statute regarding such storage, treatment, cleanup or disposal).
Section 2.22. Insurance.
The Company has maintained, and has caused each Subsidiary
to maintain, insurance coverage by financially sound and
reputable insurers with respect to their respective properties
and business in such forms and amounts and against such risks,
casualties and contingencies as are customary for corporations of
established reputation engaged in the same or a similar business
and owning and operating similar properties.
Section 2.23. Governmental Consents.
No consent, approval, qualification, order or authorization
of , or filing with, any local, state, or federal governmental
authority is required on the part of the Company in connection
with the Company's valid execution, delivery, or performance of
this Agreement, the offer, sale or issuance of the Preferred
Stock by the Company or the issuance of Common Stock upon
conversion of the Preferred Stock, except (i) the filing of the
Statement with Respect to Shares with the Secretary of State of
the Commonwealth of Pennsylvania, and (ii) such filings as have
been made prior to the Closing, except any notices of sale
required to be filed with the Securities and Exchange commission
under Regulation D of the Securities Act or such post-closing
filings as may be required under applicable state securities
laws, which will be timely filed within the applicable periods
therefor.
Section 2.24. Offering.
Subject in part to the truth and accuracy of Purchaser's
representations set forth in this Agreement, the offer, sale and
issuance of the Preferred Stock as contemplated by this Agreement
are exempt from the registration requirements of the Securities
Act, and neither the Company nor any authorized agent acting on
is behalf will take any action hereafter that would cause the
loss of such exemption.
Section 2.25. Manufacturing Rights.
The Company has not granted rights to manufacture, produce,
assemble, license, market, or sell its products to any other
person and is not bound by any agreement that affects the
Company's exclusive right to develop, manufacture, assemble,
distribute, market, or sell its products.
Section 2.26. Employees.
To the best of the Company's knowledge, there is no strike,
labor dispute or union organization activities pending or
threatened between it and its employees. None of the Company's
employees belongs to any union or collective bargaining unit. To
the best of its knowledge, the Company has complied in all
material respects with all applicable state and federal equal
opportunity and other laws related to employment. To the best of
the Company's knowledge, no employee of the Company is or will be
in violation of any judgment, decree, or order, or any term of
any employment contract, patent disclosure agreement, or other
contract or agreement relating to the relationship of any such
employee with the Company, or any other party because of the
nature of the business conducted or presently proposed to be
conducted by the Company or to the use by the employee of his or
her best efforts with respect to such business except as
disclosed in Schedule 2.26. The Company is not a party to or
bound by any currently effective employment contract, deferred
compensation agreement, bonus plan, incentive plan, profit
sharing plan, retirement agreement, or other employee
compensation agreement. The Company is not aware that any
officer or key employee, or that any group of key employees,
intends to terminate their employment with the Company, nor does
the Company have a present intention to terminate the employment
of any of the foregoing. Subject to general principles related
to wrongful termination of employees, the employment of each
officer and employee of the Company is terminable at the will of
the Company.
Section 2.27. Fees/Commissions.
The Company has not agreed to pay any finder's fee,
commission, origination fee (except for the processing due to
Purchaser pursuant to Section 1.3 hereof) or other fee or charge
to any person or entity with respect to the transactions
contemplated hereunder, except a fee of $529,981.23 payable to
Berwind Financial Group, L.P. and a fee of $75,000 payable to
First Union National Bank.
Section 2.28. 1940 Act Compliance.
The Company is an "eligible portfolio company" as such term
is defined in Section 2(a)(46) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), and the issuance
and sale by the Company of the Preferred Stock does not
constitute a "public offering" as such term is used in Section
55(a)(1) thereof.
Section 2.29. ERISA.
Except as disclosed in Schedule 2.29, the Borrower is in
compliance in all material respects with all applicable
provisions of Title IV of the Employee Retirement Income Security
Act of 1974, Pub. L. No. 93-406, September 2, 1974, except as
disclosed in Schedule 2.29, 88 Stat. 829, 29 U.S.C.A. Section 1001 et
seq. (1975), as amended from time to time ("ERISA"). Neither a
reportable event nor a prohibited transaction (as defined in
ERISA) has occurred and is continuing with respect to any
"pension plan" (as such term is defined in ERISA, a "Plan"); no
notice of intent to terminate a Plan has been filed nor has any
Plan been terminated; no circumstances exist which constitute
grounds entitling the Pension Benefit Guaranty Corporation
(together with any entity succeeding to or all of its functions,
the "PBGC") to institute proceedings to terminate, or appoint a
trustee to administer, a Plan, nor has the PBGC instituted any
such proceedings; neither Borrower nor any commonly controlled
entity (as defined in ERISA) has completely or partially
withdrawn from a multiemployer plan (as defined in ERISA);
Borrower and each commonly controlled entity has met its minimum
funding requirements under ERISA with respect to all of its Plans
and the present fair market value of all Plan property exceeds
the present value of all vested benefits under each Plan, as
determined on the most recent valuation date of the Plan and in
accordance with the provisions of ERISA and the regulations
thereunder for calculating the potential liability of Borrower or
any commonly controlled entity to the PBGC or the Plan under
Title IV or ERISA; and neither Borrower nor any commonly
controlled entity has incurred any liability to the PBGC under
ERISA.
Section 2.30. Disclosure.
No representation or warranty given as of the date hereof by
the Company contained in this Agreement or any schedule attached
hereto or any statement in any document, certificate or other
instrument furnished or to be furnished to the Purchaser pursuant
hereto, taken as a whole, contains or will (as of the time so
furnished) contain any untrue statement of a material fact, or
omits or will (as of the time so furnished) omit to state any
material fact which is necessary in order to make the statements
contained herein or therein not misleading.
Section 2.31. Survival.
The representations and warranties of the Company contained
in this Agreement shall survive until this Agreement terminates
in accordance with Section 9.5 hereof.
ARTICLE III. - REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser hereby represents to the Company as follows:
Section 3.1. Authorization.
Purchaser has full legal right, power and authority to enter
into and perform its obligations under this Agreement, the
Registration Rights Agreement and any other document executed and
delivered by Purchaser in connection herewith, without the
consent or approval of any other person, firm, governmental
agency or other legal entity. The execution and delivery of this
Agreement and any other document executed and delivered by
Purchaser in connection herewith, and the performance by
Purchaser of its obligations hereunder and/or thereunder are
within the corporate powers of Purchaser, have received all
necessary governmental approvals, if any were required, and do
not and will not contravene or conflict with the Articles of
Incorporation or Bylaws of Purchaser. The officer(s) executing
this Agreement and any other document executed and delivered by
Purchaser in connection herewith, is duly authorized to act on
behalf of Purchaser.
Section 3.2. Validity and Binding Effect.
This Agreement and any other document executed and delivered
by Purchaser in connection herewith are the legal, valid and
binding obligations of the Purchaser, enforceable against it in
accordance with their respective terms.
Section 3.3. Accredited Investor Status; Purchase for
Investment.
In connection with the sale to Purchaser of the Preferred
Stock:
(a) Purchase for Investment. Purchaser is acquiring
the Preferred Stock for its own account as principal, for
investment, and not with a view to the distribution or resale
thereof, in whole or in part, in violation of the Securities Act
or any applicable state securities law, and Purchaser has no
present intention of selling, distributing or otherwise disposing
of the Preferred Stock.
(b) No Registration; Rule 144. (i) The Preferred
Stock has not been registered under the Securities Act, and the
shares of Preferred Stock are "restricted" securities, as defined
in Rule 144; (ii) the shares of Preferred Stock may not be resold
unless they are registered under the Securities Act or unless an
exemption from registration is available; (iii) Purchaser
understands that the availability of Rule 144 for the sale and
transfer of the Preferred Stock is limited, and that certain
conditions and events must exist before Purchaser would be able
to utilize Rule 144 in connection with the sale or other
disposition of the Preferred Stock.
(c) Investment Company; Information. Purchaser is an
investment company registered under the Investment Company Act
and, to the knowledge of Purchaser, has received the financial
and other information which it has requested from the Company.
The Company has made available to Purchaser the opportunity to
ask questions and receive answers from the Company concerning the
terms and conditions of the offering of the Preferred Stock
hereunder and to obtain any additional information necessary to
verify the accuracy of any information contained in this
Agreement or furnished as above stated.
(d) Transfer to Subsidiary. Notwithstanding anything
in this Section 3.3 to the contrary, Purchaser may transfer and
assign to its rights and obligations under this Agreement to one
or more of its wholly-owned Subsidiaries, provided that any such
Subsidiary shall have executed an investment letter containing
the representations, and warranties contained in this
Section 3.3.
Section 3.4. Survival.
The representations and warranties of the Purchaser
contained in this Agreement shall survive until this Agreement
terminates in accordance with Section 9.5 hereof.
ARTICLE IV. - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
PURCHASER
The obligation of Purchaser to purchase and pay for the
Preferred Stock on the Closing Date shall be subject to the
fulfillment on or before the Closing Date of each of the
following conditions:
Section 4.1. Representations and Warranties.
The representations and warranties of the Company contained
in this Agreement and in any Schedule hereto or any document or
instrument delivered to Purchaser or its representatives
hereunder, shall have been true and correct when made and shall
be true and correct as of the Closing Date as if made on such
date, except to the extent such representations and warranties
expressly relate to a specific date. The Company shall have duly
performed all of the covenants and agreements to be performed by
it hereunder on or prior to the Closing Date.
Section 4.2. Officer's Certificate.
The Company shall have delivered to Purchaser a certificate,
dated the Closing Date, signed by the Chief Financial Officer of
the Company substantially in the form attached hereto as
Exhibit C.
Section 4.3. Satisfactory Proceedings.
All proceedings taken in connection with the transactions
contemplated by this Agreement, and all documents necessary to
the consummation thereof, shall be satisfactory in form and
substance to Purchaser and Purchaser's counsel, and the Company
shall have delivered to Purchaser a certificate, dated the
Closing Date, signed by the Secretary of the Company
substantially in the form attached hereto as Exhibit D.
Section 4.4. Statement With Respect to Shares.
The Statement With Respect to Shares shall have been filed
with the Office of the Secretary of State of the Commonwealth of
Pennsylvania.
Section 4.5. Registration Rights Agreement.
The Company shall have executed and delivered to the
Purchaser the Registration Rights Agreement.
Section 4.6. Sale of Subordinated Debentures.
The closing with respect to the sale by the Company and the
purchase by the Purchaser of $4,000,000 of the Company's 12%
subordinated debentures due March 27, 2004, shall occur
simultaneously with the sale of the Preferred Stock by the
Company to the Purchaser.
Section 4.7. Closing of FUNB Financing.
The closing of the initial borrowing under the Revolving
Credit Agreement between the Company and FUNB, dated as of
March 27, 1997 (the "FUNB Facility") shall have occurred
simultaneously with the closing hereunder.
Section 4.8. Legal Opinion.
Purchaser shall have received the opinion of Stevens & Lee,
A Professional Corporation, counsel for the Company, dated the
Closing Date, addressed to Purchaser, in form and substance
satisfactory to Purchaser, and covering the matters set forth in
Exhibit E hereto.
Section 4.9. The Company's Existence and Authority.
The Company shall have delivered to Purchaser the following
certificates of public officials, in each case as of a recent
date:
DMS the Articles of Incorporation of the Company, as
amended by the Statement With Respect to Shares, certified by the
Secretary of State of Pennsylvania;
(b) a certificate of existence or good standing of the
Company in the Commonwealth of Pennsylvania and as a foreign
corporation in each of the jurisdictions set forth in
Schedule 2.1(a);
(c) the Articles of Association and the equivalent
under applicable laws of a good standing certificate of ETC
International Corporation.
Section 4.10. Required Consents.
Any consents or approvals required to be obtained from any
third party, including any holder of indebtedness or any
outstanding security of the Company, and any amendments of
agreements which shall be necessary to permit the consummation of
the transactions contemplated hereby on the Closing Date, shall
have been obtained and all such consents or amendments shall be
satisfactory in form and substance to Purchaser and Purchaser's
counsel.
Section 4.11. Waiver of Conditions.
If on the Closing Date the Company fails to tender to
Purchaser the Preferred Stock to be issued to Purchaser on such
date or if the conditions specified in this Article IV have not
been fulfilled, Purchaser may thereupon elect to be relieved of
all further obligations under this Agreement. Without limiting
the foregoing, if the conditions specified in this Article IV
have not been fulfilled, Purchaser may waive compliance by the
Company with any such condition to such extent as Purchaser, in
Purchaser's sole discretion, may determine. Nothing in this
Section 4.7 shall operate to relieve the Company of any of its
obligations hereunder or to waive any of Purchaser's rights
against the Company.
ARTICLE V. - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE
COMPANY
Section 5.1. Representations and Warranties.
The representations and warranties of the Purchaser
contained in Section 3 shall be true on and as of the Closing
Date with the same effect as though such representations and
warranties had been made on and as of the date of the Closing
Date.
Section 5.2. Qualifications.
All authorizations, approvals, or permits, if any, of any
governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful
issuance and sale of the Preferred Stock pursuant to this
Agreement shall be duly obtained and effective as of the Closing
Date.
ARTICLE VI. - COVENANTS OF COMPANY
From and after the Closing Date and continuing so long as
Purchaser holds the Preferred Stock:
Section 6.1. Use of Proceeds.
The Company shall use the proceeds of the sale of the
Preferred Stock only for the purposes set forth on Schedule 6.1
attached hereto.
Section 6.2. Repurchase of Preferred Stock.
Neither the Company nor any Subsidiary or Affiliate,
directly or indirectly, may repurchase or make any offer to
repurchase any Preferred Stock and the Preferred Stock may only
be redeemed in accordance with its terms.
Section 6.3. Corporate Existence, Etc.
The Company will preserve and keep in force and effect, and
will cause each Subsidiary to preserve and keep in force and
effect, its corporate existence and good standing in the state of
incorporation thereof, its qualification and good standing as a
foreign corporation in each jurisdiction where such qualification
is required by applicable law except where the failure to so
qualify would not have a material adverse effect on the financial
condition or results of operations of the Company and all
licenses and permits necessary to the proper conduct of its
business.
Section 6.4. Maintenance, Etc.
The Company will maintain, preserve and keep, and will cause
each Subsidiary to maintain, preserve and keep, its properties
and assets which are used or useful in the conduct of its
business (whether owned in fee or pursuant to a leasehold
interest) in good repair and working order and from time to time
will make all necessary repairs, replacements, renewals and
additions so that at all times the efficiency thereof shall be
maintained.
Section 6.5. Nature of Business.
Neither the Company nor any Subsidiary will engage in any
business if, as a result, the general nature of the business,
taken on a consolidated basis, which would then be engaged in by
the Company and its Subsidiaries would be substantially changed
from the general nature of the business engaged in by the Company
and its Subsidiaries on the date of this Agreement.
Section 6.6. Insurance.
The Company will maintain, and will cause each Subsidiary to
maintain, insurance coverage by financially sound and reputable
insurers with respect to their respective properties and business
in such forms and amounts and against such risks, casualties and
contingencies as are customary for corporations of established
reputation engaged in the same or a similar business and owning
and operating similar properties.
Section 6.7. Taxes, Claims for Labor and Materials.
The Company will promptly pay and discharge, and will cause
each Subsidiary promptly to pay and discharge, (i) all lawful
taxes, assessments and governmental charges or levies imposed
upon the property or business of the Company or such Subsidiary,
respectively, (ii) all trade accounts payable in accordance with
usual and customary business terms, and (iii) all claims for
work, labor or materials, which if unpaid might become a lien or
charge upon any property of the Company or such Subsidiary;
provided the Company or such Subsidiary shall not be required to
pay any such tax, assessment, charge, levy, account payable or
claim if (i) the validity, applicability or amount thereof is
being contested in good faith by appropriate actions or
proceedings which will prevent the forfeiture or sale of any
property of the Company or such Subsidiary or any material
interference with the use thereof by the Company or such
Subsidiary, and (ii) the Company or such Subsidiary shall set
aside on its books, reserves deemed by it to be adequate with
respect thereto.
Section 6.8. Compliance with Laws.
Except where failure to do so does not and would not
constitute a Material Adverse Event, Company shall maintain its
business operations and property owned or used in connection
therewith in compliance with (i) all applicable federal, state
and local laws, regulations and ordinances, and such laws,
regulations and ordinances of foreign jurisdictions, governing
such business operations and the use and ownership of such
property, and (ii) all agreements, licenses, franchises,
indentures and mortgages to which Company is a party or by which
Company or any of its properties is bound. Without limiting the
foregoing, Company shall pay all of its indebtedness promptly and
substantially in accordance with the terms thereof.
Section 6.9. ERISA Matters.
If Borrower has in effect, or hereafter institutes, a
pension plan that is subject to the requirements of ERISA, then
the following covenants shall be applicable during such period as
any Plan shall be in effect: (i) Borrower hereby covenants that
throughout the existence of the Plan, Borrower's contributions
under the Plan will meet the minimum funding standards required
by ERISA and Borrower will not institute a distress termination
of the Plan; and (ii) Borrower covenants that it will send to
Lender a copy of any notice of any "reportable event" (as defined
in ERISA) required by ERISA to be filed with the Labor Department
or the Pension Benefit Guaranty Corporation, at the time that
such notice is so filed; provided, however, that the current
violation of this covenant as described in Schedule 2.30 shall
not be a violation of this Section 6.9 so long as such violation
is cured within ten (10) days of the date hereof.
Section 6.10. Books and Records; Rights of Inspection.
The Company will keep, and will cause each Subsidiary to
keep, proper books of record and account in which full and
correct entries will be made of all dealings or transactions of
or in relation to the business and affairs of the Company or such
Subsidiary, in accordance with generally accepted accounting
principles consistently maintained. The Company shall permit a
representative of Purchaser to visit any of its properties and
inspect its corporate books and financial records, and will
discuss its accounts, affairs and finances with a representative
of Purchaser, during reasonable business hours, at all such times
as Purchaser may reasonably request.
Section 6.11. Reports.
The Company will furnish to Purchaser the following
(provided, that this obligation shall be deemed satisfied if the
Company delivers the following to the Purchaser in connection
with that certain Debenture Purchase Agreement by and between the
Company and Purchaser of even date herewith):
(a) Monthly statements. Within twenty-five (25) days
of the end of each month, beginning for the month of April, 1997,
monthly internal financial reports which at a minimum shall
consist of a balance sheet of the Company as of the close of such
month and related statements of income and cash flows for the
one-month period then ended, as well as any additional financial
reports for such period routinely prepared with respect to the
Company and the Subsidiaries;
(b) Quarterly Statements. As soon as available and in
any event within 45 days after the end of each quarterly fiscal
period (except the last) of each fiscal year, copies of:
(i) consolidated and consolidating balance sheets of
the Company and Subsidiaries as of the close of
the three-month period then ended, setting forth
in comparative form the consolidated figures for
the corresponding period of the preceding fiscal
year,
(ii) consolidated and consolidating statements of
income and retained earnings of the Company and
Subsidiaries for the three-month period then
ended, setting forth in comparative form the
consolidated figures for the corresponding period
of the preceding fiscal year, and
(iii) consolidated and consolidating statements of cash
flows of the Company and Subsidiaries for the
portion of the fiscal year ending with such
three-month period, setting forth in comparative
form the consolidated figures for the
corresponding period of the preceding fiscal year,
all in reasonable detail and accompanied by a certificate of
an authorized financial officer of Company that such financial
statements fairly present the financial condition and results of
operations and cash flows of the Company and for the periods
presented subject to normal par and adjustment;
(c) Annual Statements. As soon as available and in
any event within 90 days after the close of each fiscal year of
the Company, copies of:
(i) consolidated and consolidating balance sheets of
the Company and Subsidiaries as of the close of
such fiscal year, and
(ii) consolidated and consolidating statements of
income and retained earnings and cash flows of the
Company and Subsidiaries for such fiscal year,
in each case setting forth in comparative form the
consolidated figures for the preceding fiscal year, all in
reasonable detail and accompanied by an unqualified report
thereon of a firm of independent public accountants of recognized
national standing or a firm reasonably acceptable to Purchaser;
(d) Audit Reports. Promptly upon receipt thereof, one
copy of each interim or special audit made by independent
accountants of the books of the Company or any Subsidiary;
(e) SEC and Other Reports. Promptly upon their
becoming available, one copy of each financial statement, report,
notice or proxy statement sent by the Company to stockholders
generally and of each periodic or current report, and any
registration statement or prospectus filed by the Company or any
Subsidiary with any securities exchange or the SEC or any
successor agency, and copies of any orders in any proceedings to
which the Company or any of its Subsidiaries is a party, issued
by any governmental agency, federal or state, having jurisdiction
over the Company or any of its Subsidiaries. The Company
specifically covenants to timely file each such item required to
be filed with the SEC and each state requiring securities laws
filings; and
(f) Requested Information. With reasonable
promptness, such other data and information as Purchaser or any
such institutional holder may reasonably request.
Section 6.12. [Reserved].
Section 6.13. Board of Directors; Observer Rights.
(a) Effective upon the closing of the transactions
pursuant to Section 1.2 hereof, and for so long as the initial
Purchaser or any Affiliate owns at least 33 1/3% of the original
number of shares of Preferred Stock sold hereby, (i) the size of
the Board of Directors of the Company shall be increased to six
(6) directors and shall remain at such size, and (ii) the Company
agrees to include a nominee of the initial Purchaser in
management's slate of nominees to be elected to the Board of
Directors and to recommend to the stockholders the election of
such nominee.
(b) For so long as the Preferred Stock shall remain
outstanding and is owned by Purchaser or any Affiliate, provided
that no nominee of the initial Purchaser is a director, the
Company shall invite one representative of Purchaser to attend,
at the Company's expense, all meetings of the Company's Board of
Directors and all committees of the Company's Board of Directors
in a nonvoting capacity and, in this respect, shall give such
representative copies of all notices and meeting agenda in
advance of such meetings and shall permit such representative to
review all documents and other materials provided to directors at
such meetings. The Company shall also provide Purchaser, in
advance, with copies of all actions proposed to be taken by the
Board of Directors in lieu of meeting.
Section 6.14. [Reserved].
ARTICLE VII. - AMENDMENTS, WAIVERS AND CONSENTS
Section 7.1. Consent Required.
Any term, covenant, agreement or condition of this Agreement
may, with the consent of the Company, be amended or compliance
therewith may be waived (either generally or in a particular
instance and either retroactively or prospectively, if the
Company shall have obtained the consent in writing of the holders
of at least 50% of the outstanding Preferred Stock.
Section 7.2. Effect of Amendment or Waiver.
Any such amendment or waiver shall apply equally to all of
the holders of the Preferred Stock and shall be binding upon
them, upon each future holder of any Preferred Stock and upon the
Company. No such amendment or waiver shall extend to or affect
any obligation not expressly amended or waived or impair any
right consequent thereon.
ARTICLE VIII. - INTERPRETATION OF AGREEMENT; DEFINITIONS
Section 8.1. Definitions.
Unless the context otherwise requires, the terms hereinafter
set forth when sued herein shall have the following meanings and
the following definitions shall be equally applicable to both the
singular and plural forms of any of the terms herein defined:
"Affiliate" shall mean any Person (a) which directly or
indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, the Company,
(b) which beneficially owns or holds 5% or more of any class of
the Voting Stock of the Company or (c) 5% or more of the Voting
Stock (or in the case of a Person which is not a corporation, 5%
or more of the equity interest) of which is beneficially owned or
held by the Company or a Subsidiary. The term "control" means
possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person,
whether through the ownership of Voting Stock, by contract or
otherwise.
"Material Adverse Event" shall mean any event or
circumstance, or set of events or circumstances, individually or
collectively, that reasonably could be expected to result in any
(i) adverse effect upon the validity or enforceability of any of
the Operative Documents, or (ii) material and adverse effect on
the financial condition of the Company as represented to
Purchaser herein or in any document delivered to Purchaser in
connection herewith, or (iii) default or potential default under
any of the Operative Documents.
"Person" shall mean an individual, partnership, corporation,
trust or unincorporated organization, and a government or agency
or political subdivision thereof.
"Rule 144" shall mean Rule 144 as promulgated by the SEC
under the Securities Act, as such Rule may be amended from time
to time, or any similar successor rule that may be promulgated by
the SEC.
"Security" shall have the same meaning as in Section 2(1) of
the Securities Act of 1933, as amended.
The term "Subsidiary" shall mean, as to any particular
parent corporation, any corporation of which more than 50% (by
number of votes) of the Voting Stock shall be owned by such
parent corporation and/or one or more corporations which are
themselves Restricted Subsidiaries of such parent corporation.
The term "Subsidiary" shall mean a subsidiary of the Company.
Section 8.2. Accounting Principles.
Where the character or amount of any asset or liability or
item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be
made for the purposes of this Agreement, the same shall be done
in accordance with GAAP, to the extent applicable, except where
such principles are inconsistent with the requirements of this
Agreement.
Section 8.3. Directly or Indirectly.
Where any provision in this Agreement refers to action to be
taken by any Person, or which such Person is prohibited from
taking such provision shall be applicable whether the action in
question is taken directly or indirectly by such Person.
ARTICLE IX. - MISCELLANEOUS
Section 9.1. Expenses, Stamp Tax Indemnity.
Whether or not the transactions herein contemplated shall be
consummated, the Company agrees to pay directly all of
Purchaser's out-of-pocket expenses in connection with the
entering into of this Agreement and the consummation of the
transactions contemplated hereby, including but not limited to
the reasonable fees, expenses and disbursements of Sherrard &
Roe, PLC, Purchaser's counsel, the entering into of this
Agreement and the consummation of duplicating and printing cost,
and so long as Purchaser holds any of the Preferred Stock, all
such expenses relating to any amendments, waivers or consents
pursuant to the provisions hereof (whether or not the same are
actually executed and delivered), including, without limitation,
any amendments, waivers or consents resulting from any work-out,
restructuring or similar proceedings relating to the performance
by the Company of its obligations under this Agreement. The
Company also agrees that it will pay and save Purchaser harmless
against any and all liability with respect to stamp and other
taxes, if any, which may be payable in connection with the
execution and delivery of this Agreement or the issuance of the
Preferred Stock, whether or not any shares of Preferred Stock are
then outstanding. The Company agrees to protect and indemnify
Purchaser against any liability for any and all brokerage fees
and commissions payable or claimed to be payable to any Person in
connection with the transactions contemplated by this Agreement.
Section 9.2. Powers and Rights Not Waived; Remedies
Cumulative.
No delay or failure on the part of the holder of any
Preferred Stock in the exercise of any power or right shall
operate as a waiver thereof; nor shall any single or partial
exercise of the same preclude any other of further exercise
thereof, or the exercise of any other power or right, and the
rights and remedies of the holder of any Preferred Stock are
cumulative to and are not exclusive of any rights or remedies any
such holder would otherwise have, and no waiver or consent, given
or extended pursuant to Article XI hereof, shall extend to or
affect any obligation or right not expressly waived or consented
to.
Section 9.3. Notices.
All communications provided for hereunder shall be in
writing and shall be delivered personally, or mailed by
registered mail, or by prepaid overnight air courier, or by
facsimile communication, in each case addressed:
If to Purchaser: Tandem Capital, Inc.
500 Church Street, Suite 200
Nashville, Tennessee 37219
Fax: (615) 726-1208
Attention: Craig Macnab
with a copy to: Sherrard & Roe, PLC
424 Church Street, Suite 2000
Nashville, Tennessee 37219
Fax: (615) 742-4539
Attention: Donald I.N. McKenzie, Esq.
If to the Company: Environmental Tectonics Corporation
125 James Way
Southampton, Pennsylvania 18966-3877
Fax: (215) 357-4000
Attention: William F. Mitchell
with a copy to: Stevens & Lee, A Professional
Corporation
One Glenhardie Corporate Center
1275 Drummers Lane
P.O. Box 236
Wayne, Pennsylvania 19087
Fax: (610) 687-1384
Attention: Jeffrey P. Waldron, Esq.
or such other address as Purchaser or the subsequent holder of
any Preferred Stock initially issued to Purchaser may designate
to the Company in writing, or such other address as the Company
may in writing designate to Purchaser or to a subsequent holder
of the Preferred Stock initially issued to Purchaser, provided,
however, that a notice sent by overnight air courier shall only
be effective if delivered at a street address designated for such
purpose by such person and a notice sent by facsimile
communication shall only be effective if made by confirmed
transmission at a telephone number designated for such purpose by
such person or, in either case, as Purchaser or a subsequent
holder of any Preferred Stock initially issued to Purchaser may
designate to the Company in writing or at a telephone number
herein set forth in the case of the Company.
Section 9.4. Successors and Assigns.
This Agreement and the other Operative Documents may be
endorsed, assigned and/or transferred in whole or in part by
Purchaser, and any such holder and/or assignee of the same shall
succeed to and be possessed of the rights and powers of Purchaser
under all of the same to the extent transferred and assigned.
The Company shall not assign any of its rights nor delegate any
of its duties under this Agreement or any of the other Operative
Documents by operation of law or otherwise without the prior
express written consent of Purchaser, and in the event the
Company obtains such consent, this Agreement and the other
Operative Documents shall be binding upon such assignee.
Section 9.5. Survival of Covenants and Representations.
All covenants, representations and warranties made by the
Company herein and in any certificates delivered pursuant hereto,
whether or not in connection with the Closing Date, shall survive
the closing and the delivery of this Agreement and the Closing
Date.
Section 9.6. Severability.
Should any part of this Agreement for any reason be declared
invalid or unenforceable, such decision shall not affect the
validity of any remaining portion, which remaining portion shall
remain in force and effect as if this Agreement had been executed
with the invalid or unenforceable portion thereof eliminated and
it is hereby declared the intention of the parties hereto that
they would have executed the remaining portion of this Agreement
without including therein any such part, parts or portion which
may for any reason, be hereafter declared invalid or
unenforceable.
Section 9.7. Governing Law.
This agreement and the Preferred Stock issued and sold
hereunder shall be governed by and construed in accordance with
Tennessee law, without regard to its conflict of law rules.
Section 9.8. Captions; Counterparts.
The descriptive headings of the various Sections or parts of
this Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof. This
Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute
one and the same instrument.
Section 9.9. Entire Agreement.
This Agreement constitutes the entire agreement of the
parties with regard to the sale of the Preferred Stock.
<PAGE>
* * *
IN WITNESS WHEREOF, the parties hereto have caused this
Preferred Stock Purchase Agreement to be executed and delivered
by their duly authorized officers as of the date first written
above.
COMPANY: ENVIRONMENTAL TECTONICS CORPORATION
By:/s/ Duane Deaner
Duane Deaner, Chief Financial Officer
PURCHASER: SIRROM CAPITAL CORPORATION
By:/s/ Craig Macnab
Name: Craig Macnab
Title: Vice President
Exhibit 10.9
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES
LAW AND MAY NOT BE TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT
UNDER THE ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL
HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) IN THE OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER THE ACT
AND SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN
CONNECTION WITH SUCH PROPOSED TRANSFER.
STOCK PURCHASE WARRANT
This Warrant is issued this 27th day of March, 1997, by
ENVIRONMENTAL TECTONICS CORPORATION, a Pennsylvania corporation
(the "Company"), to SIRROM CAPITAL CORPORATION, a Tennessee
corporation (SIRROM CAPITAL CORPORATION and any subsequent
assignee or transferee hereof are hereinafter referred to
collectively as "Holder" or "Holders").
AGREEMENT:
1. Issuance of Warrant; Term. For and in
consideration of SIRROM CAPITAL CORPORATION purchasing from the
Company its debenture due March 27, 2004, in the initial
principal amount of Four Million and no/100ths Dollars (the
"Debenture") pursuant to the terms of a Debenture Purchase
Agreement of even date herewith (the "Debenture Purchase
Agreement"), and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the
Company hereby grants to Holder the right to purchase
166,410 shares of the Company's common stock, par value $.10 per
share (the "Common Stock"), which the Company represents to equal
five percent (5%) of the shares of capital stock outstanding on
the day immediately prior to the date hereof, calculated on a
fully diluted basis, excluding the shares of Common Stock
issuable upon conversion of the Series A Convertible Preferred
Stock of the Company issued and sold to Sirrom Capital
Corporation on the date hereof and assuming exercise of this
Warrant ("Base Amount"). The shares of Common Stock issuable
upon exercise of this Warrant are hereinafter referred to as the
"Shares." This Warrant shall be exercisable at any time and from
time to time from the date hereof until March 27, 2004.
2. Exercise Price. The exercise price (the "Exercise
Price") per share for which all or any of the Shares may be
purchased pursuant to the terms of this Warrant shall be One
Dollar ($1.00).
3. Exercise. This Warrant may be exercised by the
Holder hereof (but only on the conditions hereinafter set forth)
as to all or any increment or increments of one hundred (100)
Shares (or the balance of the Shares if less than such number),
upon delivery of written notice of intent to exercise to the
Company at the following address: 125 James Way, Southampton, PA
18966-3877 or such other address as the Company shall designate
in a written notice to the Holder hereof, together with this
Warrant and payment to the Company of the aggregate Exercise
Price of the Shares so purchased. The Exercise Price shall be
payable, at the option of the Holder, (i) by certified or bank
check, (ii) by the surrender of the Debenture or portion thereof
having an outstanding principal balance equal to the aggregate
Exercise Price or (iii) by the surrender of a portion of this
Warrant where the Shares subject to the portion of this Warrant
that is surrendered have a Fair Market Value (as defined in
Section 4(c) below) equal to the aggregate Exercise Price. Upon
exercise of this Warrant as aforesaid, the Company shall as
promptly as practicable, and in any event within fifteen (15)
days thereafter, execute and deliver to the Holder of this
Warrant a certificate or certificates for the total number of
whole Shares for which this Warrant is being exercised in such
names and denominations as are requested by such Holder. If this
Warrant shall be exercised with respect to less than all of the
Shares, the Holder shall be entitled to receive a new Warrant
covering the number of Shares in respect of which this Warrant
shall not have been exercised, which new Warrant shall in all
other respects be identical to this Warrant. The Company
covenants and agrees that it will pay when due any and all state
and federal issue taxes which may be payable in respect of the
issuance of this Warrant or the issuance of any Shares upon
exercise of this Warrant.
4. Covenants and Conditions. The above provisions
are subject to the following:
(a) Neither this Warrant nor the Shares have been
registered under the Securities Act of 1933, as amended
("Securities Act") or any state securities laws ("Blue Sky
Laws"). This Warrant has been acquired for investment purposes
and not with a view to distribution or resale and may not be sold
or otherwise transferred without (i) an effective registration
statement for such Warrant under the Securities Act and such
applicable Blue Sky Laws, or (ii) an opinion of counsel, which
opinion and counsel shall be reasonably satisfactory to the
Company and its counsel, that registration is not required under
the Securities Act or under any applicable Blue Sky Laws (the
Company hereby acknowledges that Sherrard & Roe, PLC is
acceptable counsel). Transfer of the shares issued upon the
exercise of this Warrant shall be restricted in the same manner
and to the same extent as the Warrant and the certificates
representing such Shares shall bear substantially the following
legend:
THE SHARES OF COMMON STOCK
REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY APPLICABLE
STATE SECURITIES LAW AND MAY NOT BE
TRANSFERRED UNTIL (I) A
REGISTRATION STATEMENT UNDER THE
ACT AND SUCH APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO, OR
(II) IN THE OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY,
REGISTRATION UNDER SUCH ACT AND
SUCH APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED IN CONNECTION
WITH SUCH PROPOSED TRANSFER.
The Holder hereof and the Company agree to execute such other
documents and instruments as counsel for the Company reasonably
deems necessary to effect the compliance of the issuance of this
Warrant and any shares of Common Stock issued upon exercise
hereof with applicable federal and state securities laws.
(b) The Company covenants and agrees that all
Shares which may be issued upon exercise of this Warrant will,
upon issuance and payment therefor, be legally and validly issued
and outstanding, fully paid and nonassessable, free from all
taxes, liens, charges and preemptive rights, if any, with respect
thereto or to the issuance thereof. The Company shall at all
times reserve and keep available for issuance upon the exercise
of this Warrant such number of authorized but unissued shares of
Common Stock as will be sufficient to permit the exercise in full
of this Warrant.
(c) The Company covenants and agrees that it
shall not sell any shares of the Company's capital stock at a
price per share below the Fair Market Value of such shares,
without the prior written consent of the Holder hereof except
pursuant to exercise of (i) options outstanding as of the date
hereof, (ii) options granted subsequent to the date hereof
provided, however, the exercise price of such options is no less
than the Fair Market Value of the Common Stock at the date of the
grant, or (iii) the warrant for the purchase of 100,000 shares of
Common Stock currently held by Chase Manhattan Capital
Corporation. In the event that the Company sells shares of the
Company's capital stock in violation of this Section 3(c), the
number of shares issuable upon exercise of this Warrant shall be
equal to the product obtained by multiplying the number of shares
issuable pursuant to this Warrant prior to such sale by the
quotient obtained by dividing (i) the Fair Market Value of the
shares issued in violation of this Section 3(c) by (ii) the price
at which such shares were sold.
(d) "Fair Market Value" per share of Common Stock
shall mean (i) in the case of a security listed or admitted to
trading on any securities exchange, the last reported sale price,
regular way (as determined in accordance with the practices of
such exchange), on such day, or if no sale takes place on such
day, the average of the closing bid and asked prices on such day
(and in the case of a security traded on more than one national
securities exchange, at such price or such average, upon the
exchange on which the volume of trading during the last calendar
year was the greatest), (ii) in the case of a security not then
listed or admitted to trading on any securities exchange, the
last reported sale price on such day, or if no sale takes place
on such day, the average of the closing bid and asked prices on
such day, as reported by a reputable quotation service designated
by the Company, (iii) in the case of a security not then listed
or admitted to trading on any securities exchange and as to which
no such reported sale price or bid and asked prices are
available, the average of the reported high bid and low asked
prices on such day, as reported by a reputable quotation service,
or the Wall Street Journal, or if there are no bids and asked
prices on such day, the average of the high bid and low asked
prices, as so reported, on the most recent day (not more than 30
days prior to the date in question) for which prices have been so
reported, and (iv) in the case of a security determined by the
Company's Board of Directors as not having an active quoted
market or in the case of other property, such fair market value
as shall be determined by the Board of Directors. The
determination as to whether any fractional shares are issuable
shall be based upon the total number of shares of Preferred
Stock being converted at any one time by any holder thereof, not
upon each share of Preferred Stock being converted.
(e) In the event that the Company, pursuant to
the terms of that certain letter agreement dated July 28, 1994,
between the Company and Osprey Partners ("Osprey"), grants to
Osprey a warrant to purchase 125,000 shares of the Common Stock,
then the number of Shares as to which this Warrant initially is
exercisable shall be increased by 6,250 shares, subject to
further adjustment as provided herein.
5. Transfer of Warrant. Subject to the provisions of
Section 3 hereof, this Warrant may be transferred, in whole or in
part, to any person or business entity, by presentation of the
Warrant to the Company with written instructions for such
transfer; provided, however, that this Warrant shall not be
transferred without the prior written consent of the Company to
either of Wyle Labs or Latecoere or to any entity that controls,
is controlled by, or is under common control with either of Wyle
Labs or Latecoere. Upon such presentation for transfer, the
Company shall promptly execute and deliver a new Warrant or
Warrants in the form hereof in the name of the assignee or
assignees and in the denominations specified in such
instructions. The Company shall pay all expenses incurred by it
in connection with the preparation, issuance and delivery of
Warrants under this Section.
6. Warrant Holder Not Shareholder; Rights Offering;
Preemptive Rights. Except as otherwise provided herein, this
Warrant does not confer upon the Holder, as such, any right
whatsoever as a shareholder of the Company. Notwithstanding the
foregoing, if the Company should offer to all of the Company's
shareholders the right to purchase any securities of the Company,
then all shares of Common Stock that are subject to this Warrant
shall be deemed to be outstanding and owned by the Holder and the
Holder shall be entitled to participate in such rights offering.
The Company shall not grant any preemptive rights with respect to
any of its capital stock without the prior written consent of the
Holder.
7. Observation Rights. A nominee of the holder of
that portion of this Warrant representing a majority of
underlying shares shall receive notice of and be entitled to
attend or may send a representative to attend all meetings of the
Company's Board of Directors in a non-voting observation capacity
and shall receive a copy of all correspondence and information
delivered to the Company's Board of Directors, from the date
hereof until such time as the indebtedness evidenced by the
Debenture has been paid in full; provided, however, that this
requirement shall be deemed satisfied so long as a nominee of the
original purchaser of the Debenture is a director of the Company.
8. Adjustment Upon Changes in Stock.
(a) If all or any portion of this Warrant shall
be exercised subsequent to any stock split, stock dividend,
recapitalization, combination of shares of the Company, or other
similar event, occurring after the date hereof, then the Holder
exercising this Warrant shall receive, for the aggregate price
paid upon such exercise, the aggregate number and class of shares
which such Holder would have received if this Warrant had been
exercised immediately prior to the record date for such stock
split, stock dividend, recapitalization, combination of shares,
or other similar event. If any adjustment under this Section
8(a), would create a fractional share of Common Stock or a right
to acquire a fractional share of Common Stock, such fractional
share shall be disregarded and the number of shares subject to
this Warrant shall be the next higher number of shares, rounding
all fractions upward. Whenever there shall be an adjustment
pursuant to this Section 8(a), the Company shall forthwith notify
the Holder or Holders of this Warrant of such adjustment, setting
forth in reasonable detail the event requiring the adjustment and
the method by which such adjustment was calculated.
(b) If all or any portion of this Warrant shall
be exercised subsequent to any merger, consolidation, exchange of
shares, separation, reorganization or liquidation of the Company,
or other similar event, occurring after the date hereof, as a
result of which shares of Common Stock shall be changed into the
same or a different number of shares of the same or another class
or classes of securities of the Company or another entity, or the
holders of Common Stock are entitled to receive cash or other
property, then the Holder exercising this Warrant shall receive,
for the aggregate price paid upon such exercise, the aggregate
number and class of shares, cash or other property which such
Holder would have received if this Warrant had been exercised
immediately prior to such merger, consolidation, exchange of
shares, separation, reorganization or liquidation, or other
similar event. If any adjustment under this Section 8(b) would
create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares subject to this Warrant
shall be the next higher number of shares, rounding all fractions
upward. Whenever there shall be an adjustment pursuant to this
Section 8(b), the Company shall forthwith notify the Holder or
Holders of this Warrant of such adjustment, setting forth in
reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated.
9. Certain Notices. In case at any time the Company
shall propose to:
(a) declare any cash dividend upon its Common
Stock;
(b) declare any dividend upon its Common Stock
payable in stock or make any special dividend or other
distribution to the holders of its Common Stock;
(c) offer for subscription to the holders of any
of its Common Stock any additional shares of stock in any class
or other rights;
(d) reorganize, or reclassify the capital stock
of the Company, or consolidate, merge or otherwise combine with,
or sell of all or substantially all of its assets to, another
corporation;
(e) voluntarily or involuntarily dissolve,
liquidate or wind up of the affairs of the Company; or
(f) redeem or purchase any shares of its capital
stock or securities convertible into its capital stock;
then, in any one or more of said cases, the Company shall give to
the Holder of the Warrant, by certified or registered mail,
(i) at least twenty (20) days' prior written notice of the date
on which the books of the Company shall close or a record shall
be taken for such dividend, distribution or subscription rights
or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, and (ii) in the case of
such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, at least twenty
(20) days' prior written notice of the date when the same shall
take place. Any notice required by clause (i) shall also
specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common
Stock shall be entitled thereto, and any notice required by
clause (ii) shall specify the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be.
10. Article and Section Headings. Numbered and titled
article and section headings are for convenience only and shall
not be construed as amplifying or limiting any of the provisions
of this Warrant.
11. Notice. Any and all notices, elections or demands
permitted or required to be made under this Warrant shall be in
writing, signed by the party giving such notice, election or
demand and shall be delivered personally, telecopied, telexed, or
sent by certified mail or overnight via nationally recognized
courier service (such as Federal Express), to the other party at
the address set forth below, or at such other address as may be
supplied in writing and of which receipt has been acknowledged in
writing. The date of personal delivery or telecopy or two (2)
business days after the date of mailing (or the next business day
after delivery to such courier service), as the case may be,
shall be the date of such notice, election or demand. For the
purposes of this Warrant:
The Address of Holder is: Sirrom Capital Corporation
500 Church Street, Suite 200
Nashville, Tennessee 37219
Attention: Craig Macnab
Fax No. (615) 726-1208
with a copy to: Sherrard & Roe, PLC
424 Church Street, Suite 2000
Nashville, Tennessee 37219
Attention: Donald I.N. McKenzie,
Esq.
Fax No. (615) 742-4539
The Address of Company is: Environmental Tectonics Corporation
125 James Way
Southampton, Pennsylvania 18966-3877
Attention: William F. Mitchell
Fax No. (215) 357-4000
with a copy to: Stevens & Lee, A Professional
Corporation
One Glenhardie Corporate Center
1275 Drummers Lane
P.O. Box 236
Wayne, Pennsylvania 19087
Attention: Jeffrey P. Waldron, Esq.
Fax No. (610) 687-1384
12. Severability. If any provisions(s) of this
Warrant or the application thereof to any person or circumstances
shall be invalid or unenforceable to any extent, the remainder of
this Warrant and the application of such provisions to other
persons or circumstances shall not be affected thereby and shall
be enforced to the greatest extent permitted by law.
13. Entire Agreement. This Warrant between the
Company and Holder represents the entire agreement between the
parties concerning the subject matter hereof, and all oral
discussions and prior agreement are merged herein.
14. Governing Law and Amendments. This Warrant shall
be construed and enforced under the laws of the State of
Tennessee applicable to contracts to be wholly performed in such
State. No amendment or modification hereof shall be effective
except in a writing executed by each of the parties hereto.
15. Counterparts. This Warrant may be executed in any
number of counterparts and be different parties to this Warrant
in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall
constitute one and the same Warrant.
16. Jurisdiction and Venue. The Company hereby
consents to the jurisdiction of the courts of the State of
Tennessee and the United States District Court for the Middle
District of Tennessee, as well as to the jurisdiction of all
courts from which an appeal may be taken from such courts, for
the purpose of any suit, action or other proceeding arising out
of any of its obligations arising under this Agreement or with
respect to the transactions contemplated hereby, and expressly
waives any and all objections it may have as to venue in any of
such courts.
17. Equity Participation. This Warrant is issued in
connection with the Debenture Purchase Agreement. It is intended
that this Warrant constitute an equity participation under and
pursuant to T.C.A. Section 47-24-101, et seq. and that equity
participation be permitted under said statutes and not constitute
interest on the Debenture. If under any circumstances
whatsoever, fulfillment of any obligation of this Warrant, the
Debenture Purchase Agreement, or any other agreement or document
executed in connection with the Debenture Purchase Agreement,
shall violate the lawful limit of any applicable usury statute or
any other applicable law with regard to obligations of like
character and amount, then the obligation to be fulfilled shall
be reduced to such lawful limit, such that in no event shall
there occur, under this Warrant, the Debenture Purchase
Agreement, or any other document or instrument executed in
connection with the Debenture Purchase Agreement, any violation
of such lawful limit, but such obligation shall be fulfilled to
the lawful limit. If any sum is collected in excess of the
lawful limit, such excess shall be applied to reduce the
principal amount of the Debenture.
IN WITNESS WHEREOF, the parties hereto have set their
hands as of the date first above written.
COMPANY: ENVIRONMENTAL TECTONICS
CORPORATION:
By:/s/ Duane Deaner
Duane Deaner
Chief Financial Officer
HOLDER: SIRROM CAPITAL CORPORATION
By:/s/ Craig Macnab
Name: Craig Macnab
Title: Vice President
Exhibit 13
<TABLE>
<CAPTION>
FINANCIAL REVIEW
($ in thousands, except per share data)
Fiscal Year End 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net sales $21,884 $15,580 $16,188 $16,986 $24,363
Cost of goods sold 16,142(1) 10,374 12,091 14,065 17,209
Operating expenses 4,546 3,714 4,988 4,592 5,792
Net income (loss) (20) 299 (1,405) (1,413) 373
Earnings (loss) per
common shares and
common stock equiva-
lent shares (.01) .10 (.49) (.50) .13
Working capital 9,548 7,860 9,038 10,130 9,457
Long-term obligations 6,997 5,514 7,133 6,718 4,383
Total assets $ 22,309 $ 20,926 $ 20,803 $ 18,024 $21,306
</TABLE>
No cash dividends have ever been paid on the Company's common
stock, and the Company is currently prohibited from declaring any
cash dividends under the terms of its credit facility.
(1) Cost of goods sold includes $556 for inventory write-downs,
$143 for additional depreciation recorded on a demonstrator
unit transferred from inventory to fixed assets, $284 for a
reserve for an arbitration settlement related to the
Company's government claims awarded after fiscal year-end,
and additional amortization expense of $109 for capitalized
software.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
($ in Thousands, except per share amounts)
Results of Operations
Fiscal 1997 Versus Fiscal 1996
Fiscal 1997 sales increased 40% over fiscal 1996 sales as
significant increases in Aircrew Training Systems products and
the Sterilizers segment were only partially offset by a decrease
in the Environmental line (for information concerning business
segments, see Note 10 to the consolidated financial statements).
Cost of goods sold as a percentage of sales increased to 74%
from 67% in fiscal 1996. Overall, this increase primarily
reflected the write-down of $556 of certain slow-moving products
primarily in the Aircrew Training Systems segment, $143 of
additional depreciation expense for a demonstrator unit
transferred from inventory to fixed assets, $284 related to the
Company's outstanding claim with the U.S. Navy, including an
arbitration award in late April 1997 to one of the Company's
subcontractors in the Navy CFET project for various work
performed in the building part of the project, and $109 of
additional amortization expense relating to capitalized software
costs of a certain product. The Company continues to actively
market the slow-moving items. The Company is currently reviewing
the arbitration costs as well as additional expenditures made
through October 1996 on the CFET project to determine which, if
any, will be added to the existing claims against the U.S.
Government.
The Aircrew Training Systems segment reported a
significantly higher sales level, up $5,209, or 65%, as a result
of continuing production on certain large contracts and a further
expansion of the Company's Contractor Operator and Maintenance
(COMS) business. As has been reported, the Company's backlog in
the Aircrew Training systems segment has grown significantly in
the most recent period, reflecting, to some extent, a
stabilization of the world defense market. However, despite the
sales increase, operating income decreased, reflecting a portion
of the aforementioned inventory write-downs, depreciation and
amortization expense and arbitration award as well as a larger
allocated share of the selling, general and administrative pool
of expenses.
Sales in the Sterilizers segment increased $1,451, or 30%,
reflecting the completion of certain larger contracts coupled
with increased service and spare parts activity. Operating
performance was a profit of $151 versus a loss in the prior
period. This profit resulted from the higher volume coupled with
a slight increase in the gross margin on a better mix of work and
only partially offset by the aforementioned inventory write-down.
The Environmental Systems segment experienced both decreased
sales and a higher operating loss. This segment experienced
lower bookings throughout the period coupled with higher costs on
certain products. The Company has recently implemented personnel
and product changes to strengthen operating results.
Operating and Other Expenses
Selling and administrative expenses in fiscal 1997 increased
$819 compared to the prior period but as a percent of sales
decreased to 20.0% from 22.8%. Approximately 90% of the increase
was comprised of increased sales commissions, advertising and
trade shows, and accounting and legal fees. The increase in
commissions reflected a greater mix of commissionable sales and
the increased sales activity. Advertising, brochures and trade
show activity increased because the Company made a conscious
effort to expand its presence and influence via technical
publications, symposiums, etc. Accounting and legal fees
increased as the Company evaluated its options for
recapitalization that was ultimately completed in March 1997.
The increased costs were partially offset by lower salary expense
in the selling and administrative area despite the heightened
activity.
Research and development expenditures increased slightly.
The Company continues to monitor this activity tightly.
Interest expense increased in fiscal 1997 over fiscal 1996.
The increase reflected amortization in the current period of a
non-cash deferred finance charge ($202) associated with warrants
issued in conjunction with the Company's credit facility renewal
in February 1996 coupled with interest charges for federal and
state tax settlements. Interest on bank borrowing decreased as a
result of lower average loan balances.
Other expenses decreased, primarily reflecting reduced
foreign exchange and other fees.
Fiscal 1996 Versus Fiscal 1995
Fiscal 1996 sales decreased from fiscal 1995 sales as
decreases in the Sterilizers and Environmental Systems segments
were only partially offset by increased sales in the Aircrew
Training Systems segment. (For information concerning business
segments, see Note 10 to the consolidated financial statements.)
Cost of goods sold as a percentage of sales decreased to 67%
from 75% in fiscal year 1995, primarily reflecting higher sales
in the Aircrew Training Systems segment (Aircrew Training Systems
sales historically reflect higher gross margins) coupled with the
continuing positive effects of stringent cost controls.
The Aircrew Training Systems segment reported a
significantly increased operating income in fiscal 1996 versus
fiscal 1995, reflecting the aforementioned increased sales volume
(up 40% from the prior fiscal year). Operating income in the
Aircrew Training Systems segment was also positively affected by
the continued expansion of the Company's COMS business which
involves training, operation and support at various operations
throughout the world.
The Sterilizers segment incurred a higher operating loss in
fiscal 1996 versus fiscal 1995, reflecting the decreased sales
volume (down 32%), partially offset by reduced operating
expenses.
The Environmental Systems segment realized a lower operating
loss in fiscal 1996 versus fiscal 1995 despite a 21% decrease in
sales volume. Reduced operating income from the sales reduction
was offset by the completion of higher margin projects
domestically and the positive impact of reduced operating
expenses.
International sales have been a significant portion of the
Company's business in recent years. In fiscal 1996,
approximately 59% of the Company's sales represented foreign
sales. International sales were spread across all business
segments in the 1996 fiscal period, representing 27% of the total
sales from the Sterilizers and Environmental Systems segments.
Management believes that the international market will continue
to comprise a significant portion of the Company's new business
in the next fiscal year.
Operating and Other Expenses
Selling and administrative expenses decreased in fiscal 1996
versus fiscal 1995. The reduction resulted from a reduced number
of full-time equivalent employees in fiscal 1996 coupled with
continuing stringent cost controls.
Research and development expenditures in fiscal 1996
decreased significantly from the prior period. This primarily
reflected the completion in certain major contracts of the
development stage on new products, line extensions and software
design and the beginning of production upon the attainment of
technical feasibility.
Interest expense increased in fiscal 1996 versus fiscal
1995, reflecting higher interest rates coupled with higher
interest amortization expense on long-term obligations, that were
only partially offset by a lower average loan balance.
Letter of credit fees and other expenses both decreased in
the 1996 fiscal period compared to 1995, reflecting reduced bank
fees and loan amortization costs.
Liquidity and Capital Resources
At February 28, 1997, the Company had a revolving credit
facility with a bank (the "Old Credit Facility") that provided
financing of up to an aggregate of $7.7 million. The facility
was due to expire on March 31, 1997.
In connection with the 1996 extension of the Old Credit
Facility to March 31, 1997, the Company issued to the bank
warrants to purchase 100,000 shares of the Company's common stock
at a price equal to $5.18. The Company has agreed to file a
registration statement with the Securities and Exchange
Commission to register the common stock issuable upon exercise of
the warrants. If the Registration Statement is not effective
prior to July 15, 1997, the Company will forfeit a $375,000
escrow to the bank.
On March 27, 1997, the Company executed a revolving credit
agreement (the "Credit Agreement") with a new bank establishing a
credit facility of $10 million. The facility bears interest at
the bank's prime rate and expires on May 31, 1999. Substantially
all of the Company's short-term financing is provided by this
bank. Additionally, the Company issued $4 million of
subordinated debentures, bearing interest at 12% per annum, due
March 27, 2004 to a financial investor. In connection with the
subordinated debentures, warrants were issued to acquire 166,410
shares of the Company's common stock at an exercise price of
$1.00 per share. $499 of the proceeds from the sale of the
debentures was allocated to the warrants and will be charged to
income over the term of the debentures. The Company also issued
25,000 shares of 11%, $100 face value, convertible preferred
stock for $2.5 million. Each share of preferred stock is
convertible, at the option of the shareholder, into 13.33 shares
of the Company's common stock at a price of $7.50 per share.
The proceeds from these transactions were used to repay
amounts outstanding under the Old Credit Facility at February 28,
1997.
Because of write-downs of certain inventory and other year-
end adjustments that resulted in the Company recognizing a net
loss of $20 for the fiscal year ended February 28, 1997, as of
June 6, 1997, the bank has made all credit availability under the
Credit Agreement subject to specific prior approval by the bank
pending a review of the Company's financial condition. The
Company believes this restriction will be temporary.
During fiscal 1997, the Company's net cash position
increased to $189 at February 28, 1997 from $31 at February 23,
1996. Cash was used in operations due to a significant increase
in accounts receivable due to the increase in sales and a
decrease in the billings in excess of costs and estimated
earnings on uncompleted contracts as more jobs proceeded through
their production cycle. The cash used in operations was offset
by the positive impact of non-cash expenditures and a significant
increase in customer deposits.
Non-cash expenditures included fixed asset depreciation and
capitalized software ($1,215), amortization of deferred finance
charges associated with the aforementioned 1996 refinancing
($202), and an increase in receivable and inventory reserves
($769). Customer deposits increased at year-end, reflecting a
significant level of fourth-quarter job bookings.
Partial offsets to the increased cash flow were an increase
in accounts receivable ($3,755), reflecting a higher level of
sales in the fourth quarter, continued payments under two
settlement agreements ($530), and a decrease in billings in
excess of costs on uncompleted long-term contracts, as some
larger contracts entered the production cycle.
Cash used in investing activities decreased as a result of
lower capitalization of software costs and fewer equipment
acquisitions.
Cash from financing was positive. The 1997 financing was
short-term loans from affiliated parties of $1,300, that more
than offset bank repayments of $775.
The Company has recorded approximately $2.9 million in
unbilled costs subject to negotiation, which includes contract
costs through October 1995 and which may not be received in full
during fiscal 1998. This amount includes claims made against the
U.S. Government involving a U.S. Navy gyrolab contract and a
large centrifuge contract. Additionally, the Company is
currently reviewing expenditures through October 1996 on the Navy
centrifuge contract to determine which, if any, will be added to
the existing claims with the U.S. Government. Such claims are
customary in U.S. Government contracts. To the extent the
Company is unsuccessful in further recovering contract costs,
such an event could have a material adverse effect on the
Company's liquidity and results of operations. Historically, the
Company has had good experience in that recoveries against the
U.S. Government have exceeded claims.
During the year ended February 28, 1997, the Company's
principal sources of cash were customers' advance deposits and
loans from affiliates. These funds were primarily used to
support an increase in accounts receivable, a reduction in
billings in excess of costs on long-term contracts, and
repayments under the bank line of credit.
Backlog
The Company's sales backlog at February 28, 1997 and
February 23, 1996 for work to be performed and revenue to be
recognized under written agreements after such dates was
approximately $25.8 million and $20.9 million, respectively. In
addition, the Company's training and maintenance contracts
backlog at February 28, 1997 and February 23, 1996 for work to be
performed and revenue to be recognized after that date under
written agreements was approximately $5.1 million and $2.1
million, respectively. Of the 1997 backlog, approximately $21.9
million is under contracts for aircrew training systems and
maintenance support principally for U.S. (approximately $300) and
foreign governments (approximately $19.0 million). The U.S.
Government contracts are subject to termination at the
convenience of the Government with equitable cancellation cost
recovery. Approximately 80% of the 1997 backlog is expected to
be completed prior to February 27, 1998. Subsequent to year-end,
on May 1, 1997 the Company announced receipt of the largest
contract in its 28-year history. The Ministry of Defense of the
United Kingdom awarded the Company a $21.3 million contract for
the design, manufacture, installation and long-term maintenance
support of a training and human research centrifuge which will be
located at the Royal Air Force Base at Henlow, Bedfordshire,
England.
Market for the Registrant's Common Stock and Related Security
Holder Matters
The Company's Common Stock (the "Common Stock") is traded on
the American Stock Exchange under the symbol ETC. As of June 6,
1997, the Company had 392 shareholders of record.
The following table sets forth the quarterly ranges of high
and low sale prices, and the closing sale price, for shares of
the Common Stock for the periods indicated. Such prices
represent quotations between dealers and do not include mark-ups,
mark-downs or commissions, and may not necessarily represent
actual transactions.
Sale Prices Closing
1997 High Low Sale Price
First Quarter $ 8-1/2 $ 3 $ 5-5/16
Second Quarter 5-7/8 4-1/2 5-5/8
Third Quarter 8 5-5/8 6-3/8
Fourth Quarter 7-1/2 6 6-5/8
1996
First Quarter 3-7/8 2-1/2 2-3/4
Second Quarter 3-5/8 2-3/4 3-1/8
Third Quarter 3 2-1/4 2-13/16
Fourth Quarter 4-1/8 2-5/16 3-1/2
The Company has not paid any cash dividends on the Common
Stock in the past and does not anticipate that any cash dividends
will be declared or paid in the foreseeable future. The
Company's current line of credit facility prohibits the payment
of any dividends by the Company without the lender's prior
written consent.
<PAGE>
Consolidated Balance Sheets
($ in thousands)
<TABLE>
<CAPTION>
February 28, February 23,
1997 1996
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 189 $ 31
Cash equivalents restricted for letters
of credit 665 859
Accounts receivable, net 11,352 7,710
Costs and estimated earnings in excess of
billings on uncompleted long-term contracts 3,345 4,024
Inventories 2,719 3,611
Prepaid expenses and other current assets 92 556
Total current assets 18,362 16,791
Property, plant, and equipment, at cost, net 2,480 2,498
Software development costs, net of accumulated
amortization of $3,244 and $2,563 in 1997
and 1996, respectively 1,430 1,617
Other assets 37 20
Total assets $22,309 $20,926
LIABILITIES
Current portion of long-term obligations $ 119 $ 2,441
Convertible notes payable - related parties 1,300 -
Accounts payable - trade 1,799 1,586
Billings in excess of costs and estimated
earnings on uncompleted long-term contracts 2,051 3,355
Customer deposits 1,746 104
Accrued income taxes 271 188
Net arbitration awards 306 445
Other accrued liabilities 1,222 812
Total current liabilities 8,814 8,931
Long-term obligations, less current portion:
Credit facility payable to banks 6,714 5,214
Other 283 300
6,997 5,514
Deferred income taxes, net 89 370
Total liabilities 15,900 14,815
STOCKHOLDERS' EQUITY
Common stock - authorized 10,000,000 shares,
$.10 par value; 2,963,083 and 2,928,944 shares
issued and outstanding in 1997 and 1996,
respectively 296 293
Capital contributed in excess of par value of
common stock 2,007 1,692
Retained earnings 4,106 4,126
Total stockholders' equity 6,409 6,111
Total liabilities and stockholders' equity $22,309 $20,926
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
($ in thousands, except per share data)
Year Ended Year Ended
February 28, February 23,
1997 1996
<S> <C> <C>
Net sales $21,884 $15,580
Cost of goods sold 16,142 10,374
Gross profit 5,742 5,206
Operating expenses:
Selling and administrative 4,379 3,560
Research and development 167 154
4,546 3,714
Operating income 1,196 1,492
Other expenses:
Interest expense 1,247 925
Letter of credit fees 23 23
Other, net 34 106
1,304 1,054
(Loss) income before (benefit) provision
for income taxes (108) 438
(Benefit) provision for income taxes (88) 139
Net (loss) income $ (20) $ 299
(Loss) earnings per share
(primary and fully diluted) $ (.01) $ .10
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
($ in thousands)
For the years ended February 28, 1997 and February 23, 1996
<TABLE>
<CAPTION>
Capital
contributed
in excess of
par value
Common Stock of common Retained
Shares Amount stock earnings
<S> <C> <C> <C> <C>
Balance, February 24, 1995 2,906,980 $291 $1,618 $3,827
Net income for the year - - - 299
Shares issued in connection with
employee stock purchase and
stock option plans 3,809 - 11 -
Shares issued in connection with
employee stock award 18,155 2 63
Balance, February 23, 1996 2,928,944 293 1,692 4,126
Net loss for the year - - - (20)
Issuance of stock purchase
warrants - - 202 -
Shares issued in connection with
employee stock purchase and
stock option plans 34,139 3 113 -
Balance, February 28, 1997 2,963,083 $296 $2,007 $4,106
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Consolidated Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February 23,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (20) $ 299
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating
activities:
Depreciation and amortization 1,452 1,006
Increase in allowance for doubtful accounts 113 29
(Increase) decrease in assets:
Accounts receivable (3,755) 1,891
Costs and estimated earnings in excess
of billings on uncompleted long-term
contracts 679 (873)
Inventories 606 (467)
Prepaid expenses and other current assets 464 (438)
Other assets (17) -
(Decrease) increase in liabilities:
Accounts payable 213 (61)
Billings in excess of costs and estimated
earnings on uncompleted long-term
contracts (1,304) 2,012
Customer deposits 1,642 (443)
Accrued income taxes 83 (17)
Net arbitration awards 241 -
Other accrued liabilities 410 (104)
Payments under settlement agreements (530) (353)
(Decrease) increase in deferred income taxes (281) 118
Net cash (used in) provided by
operating activities (4) 2,599
Cash flows from investing activities:
Acquisition of equipment (231) (314)
Software development costs capitalized (494) (696)
Decrease in cash surrender value of insurance
policy - 43
Net cash used in investing activities (725) (967)
Cash flows from financing activities:
Net payments under credit facility (775) (1,450)
Decrease (increase) in cash equivalents
restricted for letters of credit 194 (267)
Increase in notes payable - related party 1,300 2
Increase in other long-term obligations 68 -
Net principal payments of other long-term debt (16) (28)
Proceeds from issuance of common stock 116 76
Net cash provided by (used in)
financing activities 887 (1,667)
Net increase (decrease) in cash and
cash equivalents 158 (35)
Cash and cash equivalents at beginning of year 31 66
Cash and cash equivalents at end of year $ 189 $ 31
Supplemental schedule of cash flow information:
Interest paid $ 940 $ 881
Income taxes paid 100 38
</TABLE>
Supplemental information on noncash operating and investing
activities:
The Company transferred $286 of inventory to property,
plant, and equipment during the year ended February 28, 1997.
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share amounts)
1. Summary of Significant Accounting Policies:
Nature of Business:
The Company is primarily engaged in the development and
manufacture of aircrew and disaster simulation training
systems, sterilizers, and environmental systems. The Company
focuses on product extension and new product development.
Sales of aircrew training systems are made principally to
U.S. and foreign governmental agencies. Sales of
sterilizers and environmental systems are made to commercial
and governmental entities worldwide.
Principles of Consolidation:
The consolidated financial statements include the accounts
of Environmental Tectonics Corporation (the Company) and its
wholly-owned subsidiary, ETC International Corporation. All
material intercompany accounts and transactions have been
eliminated. The Company's fiscal year is the 52- or 53-week
annual accounting period ending the last Friday in February.
Use of Estimates:
In preparing financial statements in conformity with
generally accepted accounting principles, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during
the reporting period. Actual results could differ from
those estimates. Significant estimates include revenue
recognition under the percentage of completion method (see
Note 1, Revenue Recognition), claims receivable, inventory,
and computer software costs.
The Company has recorded approximately $2.9 million in
claims receivable for contract costs incurred through
February 28, 1997 (see Note 2), which are subject to
negotiation and audit by the U.S. and foreign governments.
To the extent the Company is unsuccessful in realizing these
claims, there could be a material adverse effect on the
Company's liquidity and results of operations.
Subsequent to February 28, 1997, $284 was awarded to one of
the Company's subcontractors in the Navy CFET project for
various work performed in the building part of the project.
The Company is currently reviewing the arbitration costs as
well as additional expenditures made through October 1996 on
the CFET project to determine which, if any, will be added
to the existing claims with the U.S. Government.
Revenue Recognition:
Revenue is recognized on long-term contracts utilizing the
percentage of completion method based on costs incurred as a
percentage of estimated total costs. Revenue recognized on
uncompleted long-term contracts in excess of amounts billed
to customers is reflected as an asset. Amounts billed to
customers in excess of revenue recognized on uncompleted
long-term contracts is reflected as a liability. When it is
estimated that a contract will result in a loss, the entire
amount of the loss is accrued. The effect of revisions in
cost and profit estimates for long-term contracts is
reflected in the accounting period in which the facts
requiring the revisions become known. The effect of
revisions in estimates of contract revenues was to increase
net loss before tax by approximately $406 and decrease net
income before tax by approximately $83 in fiscal 1997 and
1996, respectively. Contract progress billings are based
upon contract provisions for customer advance payments,
contract costs incurred, and completion of specified
contract objectives. Contracts may provide for customer
retainage of a portion of amounts billed until contract
completion. Retainage is generally due within one year of
completion of the contract. Revenue for service contracts
is recognized ratably over the life of the contract; related
material costs are expensed as incurred.
Cash and Cash Equivalents:
Cash and cash equivalents include short-term deposits at
market interest rates with original maturities of three
months or less. The Company maintains cash balances at
several financial institutions located in the Northeast.
Accounts in each institution are insured by the Federal
Deposit Insurance Corporation up to $100. Uninsured
balances aggregate to $245 at February 28, 1997.
Inventories:
Inventories are valued at the lower of cost or market. Cost
is determined principally by the first-in, first-out method.
The costs of finished goods and work-in-process inventories
include material, direct engineering, manufacturing labor,
and overhead components. The Company periodically reviews
the inventory and, if necessary, writes down the recorded
costs. During the fourth quarter of fiscal year 1997, the
Company determined that a write-down adjustment of
approximately $556 was necessary on certain slow moving
products.
Depreciation of Property, Plant, and Equipment:
Property, plant, and equipment are depreciated over their
estimated useful lives by the straight-line method for
financial reporting purposes. Accelerated depreciation
methods are used for tax purposes. Upon sale or retirement
of property, plant, and equipment, the costs and related
accumulated depreciation are eliminated from the accounts.
Any resulting gains or losses are included in the
determination of net income. During the fourth quarter of
1997, the Company transferred from inventory to fixed assets
a demonstrator unit and recorded $143 of additional
depreciation expense.
Amortization of Capitalized Software Development Costs:
The Company capitalizes the qualifying costs of developing
software contained in certain products. Capitalization of
costs requires that technological feasibility has been
established. When the software is fully documented and
tested, capitalization of development costs cease and
amortization commences over a period ranging from 36 to 60
months (dependent upon the life of the product) on a
straight-line basis which, at a minimum, approximates
estimated sales.
Realization of capitalized software costs is subject to the
Company's ability to market the related product in the
future and generate cash flows to support future operation.
Capitalized software costs and related amortization
totalled $494 and $681 for the year ended February 28, 1997.
Capitalized software costs and related amortization totalled
$696 and $573 during the year ended February 23, 1996.
During 1997, the Company reevaluated the amortization period
of costs associated with a certain product and, as a result,
an additional $109 was expensed during the fourth quarter of
1997.
Amortization of Deferred Financing Costs:
Capitalized costs relating to the acquisition of the
Company's credit facility are amortized over the term of the
credit facility. Amortization expense relating to deferred
financing costs was $202 and $3 in 1997 and 1996,
respectively.
Amortization of Discount on Settlement Payable:
The discount on settlement payable related to a products
liability settlement, the liability that was recognized in
fiscal 1996, is amortized over the term of the note.
Amortization expense was $34 and $55 in fiscal 1997 and
1996, respectively.
Income Taxes:
The Company accounts for income taxes using the liability
method, which reflects the impact of temporary differences
between values recorded for assets and liabilities for
financial reporting purposes and values utilized for
measurement in accordance with tax laws.
Long-Lived Assets:
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which provides guidance on when to recognize and how to
measure impairment losses of long-lived assets and certain
identifiable intangibles and how to value long-lived assets
to be disposed of. The adoption of SFAS No. 121 had no
material effect on the Company's consolidated financial
position or results of operations.
Stock Options:
The Company has adopted SFAS No. 123, "Accounting for Stock-
Based Compensation," which contains a fair value-based
method for valuing stock-based compensation that entities
may use, which measures compensation cost at the grant date
based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the
vesting period. Alternatively, the standard permits
entities to continue accounting for employee stock options
and similar instruments under Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock
options using APB Opinion No. 25 are required to make pro
forma disclosures of net income and earnings per share, as
if the fair value-based method of accounting defined in SFAS
No. 123 had been applied. The Company's Incentive Stock
Option Plan is accounted for under APB Opinion No. 25.
Advertising and Trade Shows Costs:
The Company expenses advertising costs as incurred.
Advertising and trade show expense was $189 and $83 for the
years ended February 28, 1997 and February 23, 1996,
respectively.
(Loss) Earnings Per Common Share:
(Loss) earnings per common share in 1997 and 1996 are based
on net income divided by the weighted average number of
common shares and common stock equivalent shares (shares
issuable upon the exercise of stock purchase warrants and
options, unless anti-dilutive) outstanding. The weighted
average number of common shares and common stock equivalent
shares outstanding was 2,965,000 and 2,935,000 in 1997 and
1996, respectively.
The Financial Accounting Standards Board has issued SFAS
No. 128, "Earnings Per Share," which is effective for
financial statements issued after December 15, 1997. The
new standard eliminates primary and fully diluted earnings
per share and requires presentation of basic and diluted
earnings per share together with disclosure of how the per
share amounts were computed. Basic earnings per share
excludes dilution and is computed by dividing income
available to common shareholders by the weighted average
common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were
exercised and converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of
the entity. Due to the antidilutive effect resulting from
the loss, the adoption of this standard will not effect
earnings per share for the year ended February 28, 1997.
Reclassifications:
Certain reclassifications have been made to the 1996
financial statements to conform with the 1997 presentation.
2. Accounts Receivable:
The components of accounts receivable at February 28, 1997
and February 23, 1996 are as follows:
1997 1996
U.S. Government receivables billed and
unbilled contract costs subject to
negotiation $ 5,284 $ 3,848
U.S. commercial receivables billed 2,477 746
International receivables billed 3,828 3,240
11,589 7,834
Less allowance for doubtful accounts (237) (124)
$11,352 $ 7,710
U.S. Government receivables billed and unbilled contract
costs subject to negotiation:
Unbilled contract costs subject to negotiation represent
claims made or to be made against the U.S. Government under
a contract for a centrifuge. These costs were recorded
during fiscal years 1994 and 1995. The Company has recorded
claims, amounting to $2.6 million, to the extent of contract
costs incurred. These costs have been incurred in connection
with U.S. Government-caused delays, errors in specifications
and designs, and other unanticipated causes and may not be
received in full during fiscal 1998. In accordance with
generally accepted accounting principles, revenue recorded
by the Company from a claim does not exceed the incurred
contract costs related to the claim. The Company currently
has approximately $8.6 million in claims filed with the U.S.
Government. The U.S. Government has responded to the claims
with either denials or deemed denials which the Company has
appealed. Additionally, the Company is now reviewing
expenditures from November 1995 through October 1996 to
determine what, if any, additional amounts can be filed as a
supplemental claim. Such claims are subject to negotiation
and audit by the U.S. Government.
In November 1996, the Company invoiced the balance due under
the centrifuge contract; at February 28, 1997, approximately
$1.7 million was included in U.S. Government receivables.
Collectibility of these amounts may be dependent upon the
resolution of the above claims.
International receivables billed:
International receivables billed includes $1.3 million
related to an arbitration award resulting from certain
claims made against a foreign government (see Note 12).
3. Costs and Estimated Earnings on Uncompleted Contracts:
The following is a summary of long-term contracts in
progress at February 28, 1997 and February 23, 1996:
1997 1996
Costs incurred on uncompleted long-term
contracts $12,539 $19,538
Estimated earnings 7,507 7,406
20,046 26,944
Less billings to date (18,752) (26,275)
$ 1,294 $ 669
1997 1996
Included in accompanying balance
sheets under the following captions:
Costs and estimated earnings in excess
of billings on uncompleted long-term
contracts $ 3,345 $ 4,024
Billings in excess of costs and
estimated earnings on uncompleted
long-term contracts (2,051) (3,355)
$ 1,294 $ 669
Included in billings in excess of costs and estimated
earnings on uncompleted long-term contracts is a provision
for anticipated losses on contracts of $163 and $72 in 1997
and 1996, respectively.
4. Inventories:
Inventories consist of the following:
Raw Work in
material process Total
February 28, 1997 $417 $2,302 $2,719
February 23, 1996 696 2,915 3,611
Inventory is presented net of a write-down of $756 and $100
in 1997 and 1996, respectively.
5. Property, Plant, and Equipment:
The following is a summary of property, plant, and
equipment, at cost, and estimated useful lives at
February 28, 1997 and February 23, 1996:
<TABLE>
<CAPTION>
Estimated
useful
1997 1996 lives
<S> <C> <C> <C>
Land $ 100 $ 100
Building and building additions 1,811 1,811 40 years
Machinery and equipment 5,288 4,793 3-5 years
Office furniture and equipment 727 716 10 years
Building improvements 812 812 5-10 years
8,738 8,232
Less accumulated depreciation (6,258) (5,734)
Property, plant, and equipment,
net $ 2,480 $ 2,498
</TABLE>
Depreciation expense for the years ended February 28, 1997
and February 23, 1996 was $536 and $375, respectively.
6. Long-Term Obligation and Credit Arrangements:
Long-term obligations at February 28, 1997 and February 23,
1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Credit facility payable to bank due
March 31, 1997 (a) $6,714 $7,489
Products liability settlement (net of
unamortized discount of $139 and $173,
respectively, based on imputed rate
of 11%) (b) 306 422
Term loans payable accruing interest
between 9.0% and 9.9% collateralized by
priority liens on certain equipment 96 44
7,116 7,955
Less current portion (119) (2,441)
$6,997 $5,514
</TABLE>
(a) At February 28, 1997, the Company had a revolving
credit facility with a bank which provided financing of
up to an aggregate of $7.7 million, expiring on
March 31, 1997. The proceeds from the credit facility
were utilized to provide working capital financing and
to support the issuance of letters of credit. The
credit facility included certain covenants related to,
among other things, prohibitions on the payment of cash
dividends, minimum tangible net worth requirements, and
various financial ratios. The credit facility is
collateralized by substantially all assets of the
Company.
Direct borrowings under the credit facility were
limited to the lesser of $7.5 million or the Company's
borrowing base as calculated pursuant to the terms of
the agreement (approximately $7.8 million borrowing
base at February 28, 1997). The letter of credit
sublimit was $7 million. At February 28, 1997, there
were $665 letters of credit outstanding (of which
approximately $464 were cash collateralized), exclusive
of a $1.1 million letter of credit for the RTAF which
was drawn against in the first quarter of fiscal 1995
(see Note 12). Interest is charged on direct
borrowings at the bank's prime rate plus 2.0%. The
interest rate was 10.25% at February 28, 1997 and
February 23, 1996. The Company was required to pay a
commitment fee of 0.5% per annum on the average unused
balance. Fees on letters of credit outstanding were
2.0% per year.
The approximate average loan balance, maximum aggregate
borrowings outstanding at any month-end payable to
banks during the fiscal years, and weighted average
interest rate computed by the days outstanding method
are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February 28,
1997 1996
<S> <C> <C>
Approximate average loan balance $ 7,131 $ 8,189
Maximum aggregate borrowings outstand-
ing at any month-end $ 7,489 $ 8,938
Weighted average interest rate 10.60% 10.33%
</TABLE>
As a condition to the issuance of the original credit
facility, warrants to purchase 100,000 shares of the
Company's common stock at $5.00 per share were issued
on November 20, 1990. These warrants expired on
November 20, 1995. As a condition to the extension of
the credit facility through March 31, 1997, warrants
were issued to purchase 100,000 shares of the Company's
common stock at a price equal of $5.18. The warrants
will be exercisable through 2001. If the holder
desires to sell or transfer any of its warrants, the
Company has the right of first refusal. A deferred
charge of $202 was assigned to the warrants and
amortized to profit and loss during the year ended
February 28, 1997. Warrants issued provide for
adjustments of the exercise price and the number of
shares issuable thereunder in the event that the
Company issues additional shares of common stock or
rights to purchase common stock at a price less than
the current warrant price or current market price,
whichever is greater. The Company has agreed to file a
registration statement with the Securities and Exchange
Commission to register the common stock issuable upon
exercise of the warrants. If the Registration
Statement is not effective prior to July 15, 1997, the
Company will forfeit a $375 escrow to the bank.
On March 27, 1997, the Company executed an agreement
(the "Credit Agreement") with a bank establishing a
revolving credit facility of $10 million through
May 31, 1998, at which time the facility is reduced to
$9 million. The facility bears interest at the bank's
base rate or adjusted Libor and expires on May 31,
1999. The credit facility includes certain covenants
related to, among other things, prohibitions on
incurring additional debt, change in ownership of
certain officers, payment of dividends and certain
financial ratio requirements. The credit facility is
collateralized by substantially all of the assets of
the Company.
Because of write-downs of certain inventory and other
year-end adjustments that resulted in the Company
recognizing a net loss of $20 for the fiscal year ended
February 28, 1997, as of June 6, 1997, the bank has
made all credit availability under the Credit Agreement
subject to specific prior approval by the bank pending
a review of the Company's financial condition. The
Company believes this restriction will be temporary.
Additionally, the Company issued $4 million of
subordinated debentures, bearing interest at 12% per
annum, due March 27, 2004. In connection with the
subordinated debentures, warrants were issued to
acquire 166,410 shares of the Company's common stock at
an exercise price of $1.00 per share; proceeds from the
debentures will be allocated to the warrants and
charged to income over the term of the debentures. The
Company also issued 25,000 shares of 11%, $100 face
value, convertible preferred stock for $2.5 million.
Each share of preferred stock is convertible, at the
option of the shareholder, into 13.33 shares of the
Company's common stock at a price of $7.50 per share.
The proceeds from these transactions were used to repay
amounts outstanding under the existing credit facility
at February 28, 1997. Accordingly, the current amounts
refinanced have been reclassified as long-term
obligations.
(b) During June 1995, the Company entered into a settlement
with the employee of a customer who brought a products
liability claim against the Company. The settlement of
$1,195 will be satisfied with (i) funds of $547
(including accrued interest) previously deposited by
the Company's products liability insurance carrier with
the U.S. District Court, and (ii) a settlement payable
to the plaintiff for the remaining amount of $648. The
Company paid $53 by July 20, 1995 and $100 on April 20,
1996. In September 1996, the Company renegotiated the
payment schedule. For the period from October 1996 to
September 1997, the Company will pay $10 per month.
Beginning October 1997, the Company will pay $5 per
month until the obligation is satisfied. The claimant
did reserve the right to pursue additional payment
amounts as per the original settlement agreement of
July 29, 1995. The Company has recorded a discount of
$207 on this settlement based on an imputed interest
rate of 11%, which will be amortized over the term of
the settlement.
The amount of long-term obligations maturing in each of the
next five fiscal years is $95 in 1998; $60 in 1999; $60 in
2000; $60 in 2001; $60 in 2002; and $80 thereafter.
7. Notes Payable - Related Parties:
Notes payable of $1.3 million represent amounts due from
directors, executive officers and their affiliates. Notes
payable, due January 1, 1998, bear interest at 10% and are
subordinated to the Company's credit facility. The payees
have the right to convert the notes into shares of the
Company's common stock. The notes are convertible into
approximately 108,000 shares, at a price of $12, if
converted on or before June 30, 1997. After June 30, 1997,
the notes can be converted at a price which is the greater
of $5 or 75% of the average closing price of the Company's
common stock. Subsequent to year-end, the Company repaid
$500 of the outstanding notes payable.
8. Leases:
Operating Leases:
The Company leases certain premises and office equipment
under operating leases which expire over the next five
years. Future minimum rental payments required under
noncancellable operating leases having a remaining term
expiring after one fiscal year as of February 28, 1997 are
$18 in 1998; $15 in 1999; $14 in 2000; $12 in 2001; and $2
in 2002.
Total rental expense for all operating leases for the years
ended February 28, 1997 and February 23, 1996 was
approximately $197 and $219, respectively.
<PAGE>
9. Income Taxes:
The components of the (benefit) provision for income taxes
are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February 28,
1997 1996
<S> <C> <C>
Current payable:
Federal $ 190 $ 21
State 3 -
193 21
Deferred:
Federal (233) 72
State (48) 46
(281) 118
$ (88) $ 139
</TABLE>
A reconciliation of the statutory federal income tax
(benefit) to the effective tax is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February 28,
1997 1996
<S> <C> <C>
Statutory income tax (34.0)% 34.0%
State income tax, net of federal tax
benefit (1.7) 8.8
Foreign sales corporation (63.9) (13.8)
Other 18.1 2.7
(81.5)% 31.7%
</TABLE>
The tax effects of the primary temporary differences giving
rise to the Company's net deferred tax liability for the
years ended February 28, 1997 and February 23, 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax liabilities:
Amortization of capitalized software $ 539 $ 629
Depreciation 336 371
Other, net - 4
875 1,004
Deferred tax assets:
Net arbitration award against Company 127 174
Net products liability settlement 116 165
Vacation reserve 48 71
Inventory reserve 285 39
Receivable reserve 89 74
Warranty reserve 44 111
Other, net 77 -
786 634
Net deferred tax liability $ 89 $ 370
</TABLE>
10. Business Segment Information:
The Company primarily manufactures, under contract, various
types of high technology equipment which it has also
designed and developed. A significant portion of the
equipment is sold directly or through distributors to
foreign markets. Except for the foreign sales activity and
certain operations and maintenance contracts, all operations
of the Company are conducted in the United States.
Information on the Company's industry segments is as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February 28,
1997 1996
<S> <C> <C>
Net sales:
Aircrew Training Systems $ 13,247 $ 8,038
Sterilizers 6,213 4,762
Environmental Systems and other 2,424 2,780
Total $ 21,884 $ 15,580
Operating income (loss)(1):
Aircrew Training Systems $ 2,153 $ 2,240
Sterilizers 151 (232)
Environmental Systems and other (455) (118)
1,849 1,890
General corporate expenses (653) (398)
Operating income 1,196 1,492
Interest expense (1,247) (925)
Letter of credit fees (23) (23)
Other, net (34) (106)
(Loss) income before income taxes $ (108) $ 438
Identifiable assets:
Aircrew Training Systems $ 14,071 $ 14,154
Sterilizers 3,819 2,376
Environmental Systems and other 1,093 1,417
Corporate assets 3,326 2,979
Total assets $ 22,309 $ 20,926
</TABLE>
(1) Included in operating income (loss) in fiscal 1997 are $556
for inventory write-downs, $143 for additional depreciation
recorded on a demonstrator unit transferred from inventory
to fixed assets, $284 for a reserve for an arbitration
settlement related to the Company's government claims
awarded after fiscal year-end, and additional amortization
expense of $109 for capitalized software.
<PAGE>
10. Business Segment Information (Continued):
Operating income (loss) consists of net sales less
applicable costs and expenses relating to these revenues.
General corporate expenses, letter of credit fees, interest
expense, other expenses, and income taxes have been excluded
from the determination of segment operating income (loss).
General corporate expenses are primarily central
administrative office expenses. Property, plant, and
equipment and, accordingly, depreciation and capital
expenditures are not identifiable with specific business
segments because most of these assets are used in each of
the segments.
Approximately 17% and 11% of sales in 1997 were made to two
international customers, totalling sales of $3,826 and
$2,527, respectively, in the Aircrew Training Systems
segment. Approximately 15% of sales in 1996 were made to
one international customer, totalling sales of $2,366 in the
Aircrew Training Systems segment.
Included in the segment information for the year ended
February 28, 1997 are export sales of approximately $15,422.
Of these amounts, there are sales to or relating to the
Governments of United Kingdom ($3,826), Japan ($2,527),
China ($1,969), Tunisia ($684) and Egypt ($483) for the sale
of the Aircrew Training Systems segment. Sales to the U.S.
Government and its agencies aggregate approximately $2,082
for the year ended February 28, 1997.
Included in the segment information for the year ended
February 23, 1996 are export sales of approximately $9,198.
Of these amounts, there are sales to or relating to the
Governments of Japan ($559), Bangladesh ($602) and the
United Kingdom ($2,366) for the sale of Aircrew Training
equipment. Sales to the U.S. Government and its agencies
aggregate approximately $1,631 for the year ended
February 23, 1996.
11. Stock Options:
The Company has a fixed Incentive Stock Option Plan (the
Plan) accounted for under APB Opinion No. 25 and related
Interpretations. The Plan allows the Company to grant
options to employees for up to 500,000 shares of common
stock and will terminate on August 24, 1998. The options,
which have a term of 10 years when issued, vest over a four-
year period. The exercise price of each option shall not be
less than 100% of the current market price of the Company's
stock on the date of grant. Accordingly, no compensation
cost has been recognized for the Plan. Had compensation
cost for the Plan been determined based on the fair value of
the options at the grant dates consistent with the method of
SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net (loss) income As reported $(20) $299
Pro forma $(37) $299
Primary and fully As reported $(.01) .10
diluted earnings per Pro forma $(.01) .10
share
</TABLE>
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes options-pricing model with
the following weighted average assumptions used for grants
in 1997: dividend yield of 0%; expected volatility of 60%;
risk-free interest rate of 6.2%%; and expected life of four
years.
A summary of the status of the Plan as of February 28, 1997
and February 23, 1996, and changes during the years ending
on those dates is presented below.
<TABLE>
<CAPTION>
1997 1996
Weighted Weighted
average average
exercise exercise
Shares price Shares price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 79,550 $ 3.19 102,450 $ 3.24
Granted 54,900 4.33 - -
Exercised (32,040) 3.30 - -
Forfeited (3,600) 4.25 (22,900) 3.19
Outstanding at end of year 98,810 3.75 79,550 3.19
Options exercisable at year end 48,635
Weighted average fair value of options
granted during the year $ 2.29 $ -
</TABLE>
The following information applies to options outstanding at
February 28, 1997:
Number outstanding 98,810
Range of exercise prices $2.25 to $4.50
Weighted average exercise price $3.75
Weighted average remaining contractual
life 6.6 years
12. Claims and Litigation:
In October 1993, the Company was notified by the Royal Thai
Air Force ("RTAF") that the RTAF was terminating a certain
$4.6 million simulator contract with the Company. Although
the Company had performed in excess of 90% of the contract,
the RTAF alleged a failure to completely perform. In
connection with this termination, the RTAF made a call on a
$229 performance bond, as well as a draw on approximately
$1.1 million of advance payment letters of credit. Work
under this contract had stopped while under arbitration, but
on October 1, 1996, the Thai Trade Arbitration Counsel
rendered its decision under which the contract was
reinstated in full and the Company was given a period of
nine months to complete the remainder of the work. Upon
completion of the contract, the RTAF will pay the Company
the open receivables balance, consisting of the performance
bond and the advance payment, plus the 10% due on the
balance of the contract. Except as noted in the award, the
rights and obligations of the parties remain as per the
original contract. Should the Company fail to perform under
the contract in the time period allotted, the RTAF could
invoke penalties against the Company, including termination
of the contract and delay penalties. Based on the progress
to date and recent discussions with the RTAF, the Company
estimates it will probably exceed the nine-month contract
completion period due to an extended delay in obtaining an
export license for certain hardware required to complete the
job. This license has been cleared and the hardware is in
the country. The Company has submitted a request for a
contract extension under the "force majeure" clause of the
RTAF contract, and the customer has agreed to an extension
to complete the installation and training.
A lawsuit was commenced against the Company in April 1997 in
the United States District Court for the District of Puerto
Rico by an employee of a customer who claims to have been
injured as a result of an alleged malfunction of a
sterilizer manufactured by the Company. The plaintiff is
seeking $3 million in damages. The Company has up to $10
million of products liability coverage, subject to a $100
deductible. The outcome of this litigation is not currently
predictable.
Certain other claims, suits, and complaints arising in the
ordinary course of business have been filed or are pending
against the Company. In the opinion of management, after
consultation with legal counsel, all such matters are
reserved for or adequately covered by insurance or, if not
so covered, are without merit or are of such kind, or
involve such amounts, as would not have a significant effect
on the financial position or results of operations of the
Company if disposed of unfavorably.
13. Related Party Transactions:
The Company transacts certain business in Europe through
Environmental Tectonics Corporation (Europe) Ltd., (ETC
Europe), an affiliated entity which is 99% owned by the
president of the Company. ETC Europe provides certain
marketing and administrative services relating to European
sales and maintenance contracts. Administrative fees paid
to ETC Europe were approximately $45 and $80 for the years
ended February 28, 1997 and February 23, 1996, respectively.
14. Employee Benefit Plan
The Company maintains a retirement savings 401(k) plan for
eligible employees. The Company's contributions to the plan
are based on a percentage of the employees' qualifying
contributions. The Company's contributions totalled $83 and
$88 in 1997 and 1996, respectively.
From time to time, the Company had not made employee
contribution payments to the trustee of its employee benefit
plan concurrent with payroll payments to such employees.
The Company is now making these payments concurrent with its
payroll. By reason of such past late payments, the Company
may be subject to certain additional interest and taxes as
well as potential penalties.
15. Quarterly Consolidated Financial Information (Unaudited):
Financial data for the interim periods of 1997 and 1996 were
as follows:
<TABLE>
<CAPTION>
Quarter Ended
May August November February
31 30 29 28
<S> <C> <C> <C> <C>
Net sales $4,509 $4,897 $5,568 $ 6,910
Gross profit 1,395 1,582 1,774 991
Operating income (loss) 439 581 703 (527)
Income (loss) before income
taxes 175 255 421 (959)
Net income (loss) 120 172 287 (599)
Earnings (loss) per common
shares and common stock
equivalent shares $ .04 $ .06 $ .09 $ (.20)
<CAPTION>
Quarter Ended
May August November February
26 25 24 23
<S> <C> <C> <C> <C>
Net sales $3,712 $3,559 $4,087 $ 4,222
Gross profit 1,426 1,251 1,270 1,259
Operating income 330 300 447 415
Income before income taxes 109 69 165 95
Net income 70 45 107 77
Earnings per common shares
and common stock equiva-
lent shares $ .02 $ .02 $ .04 $ .02
</TABLE>
16. Fourth-Quarter Adjustments:
The Company recorded the following significant fourth
quarter adjustments:
(1) $556 or $.12 per share was charged to cost of goods
sold which related to the write-down of certain slow-
moving products.
(2) $284 or $.06 per share was to record an arbitration
settlement awarded after the fiscal year ended February
28, 1997.
(3) $109 or $.03 per share was the result of reevaluation
of the amortization period of costs associated with
capitalized software of a certain product.
(4) $143 or $.03 per share was a charge to depreciation for
an inventory item transferred from inventory to
property, plant, and equipment. <PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Environmental Tectonics Corporation
We have audited the accompanying consolidated balance sheets
of Environmental Tectonics Corporation and Subsidiary as of
February 28, 1997 and February 23, 1996, and the related
consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements 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.
As discussed in Note 1 to the consolidated financial
statements, the Company has recorded receivables in the amount of
$2.9 million for claims made to or against the United States and
foreign governments for contract costs incurred through
February 28, 1997. The total net claims amount made and to be
made are approximately $8.6 million based on costs incurred
through February 28, 1997 and are subject to negotiation,
arbitration, and audit by the United States and foreign
governments.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Environmental Tectonics
Corporation and Subsidiary as of February 28, 1997 and
February 23, 1996, and the consolidated results of their
operations and cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/Grant Thornton LLP
Philadelphia, Pennsylvania
June 9, 1997
EXHIBIT 21
List of Subsidiaries
<TABLE>
<CAPTION>
Jurisdiction in Percent of Company's
Name of Entity Which Organized Equity Interest
<S> <C> <C>
ETC International Corp. U.S. Virgin Islands 100%
</TABLE>
EXHIBIT 23
Consent of Independent Certified Public Accountants
We have issued our report dated June 9, 1997,
accompanying the consolidated financial statements incorporated
by reference or included in the Annual Report of Environmental
Tectonics Corporation and Subsidiary on Form 10-KSB for the year
ended February 28, 1997. We hereby consent to the incorporation
by reference of said report in the Registration Statement of
Environmental Tectonics Corporation and Subsidiary on Form S-8
(File No. 2-92407, effective August 14, 1984) and on Form S-3
(File No. 33-42219, effective September 4, 1991).
GRANT THORNTON LLP
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
June 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<CASH> 854
<SECURITIES> 0
<RECEIVABLES> 11,589
<ALLOWANCES> 237
<INVENTORY> 2,719
<CURRENT-ASSETS> 18,362
<PP&E> 8,738
<DEPRECIATION> 6,258
<TOTAL-ASSETS> 22,309
<CURRENT-LIABILITIES> 8,814
<BONDS> 0
0
0
<COMMON> 2,303
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 23,309
<SALES> 21,884
<TOTAL-REVENUES> 21,884
<CGS> 16,142
<TOTAL-COSTS> 4,546
<OTHER-EXPENSES> 57
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,247
<INCOME-PRETAX> (108)
<INCOME-TAX> (88)
<INCOME-CONTINUING> (20)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
