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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 1998
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission file number 0-14068
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MEMRY CORPORATION
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(Name of small business issuer in its charter)
Delaware 06-1084424
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
57 Commerce Drive, Brookfield, CT 06804
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (203) 740-7311
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
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Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will 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. [ ]
Consolidated revenues of the issuer from continuing operations for the fiscal
year ended June 30, 1998 were $19,077,000.
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The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $21,000,000 on September 25, 1998 based upon the
closing trade price on that date.
The number of shares of Common Stock outstanding as of September 24, 1998:
19,951,360
Documents Incorporated by Reference. The registrant's Proxy Statement for its
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Annual Meeting of Stockholders to be held in November, 1998, is incorporated by
reference into Part III of this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format
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Yes NO X
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Item 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Memry Corporation (referred to herein as "Memry" or the "Company"), a Delaware
corporation incorporated in 1981, is an advanced materials company engaged in
the business of developing, manufacturing and marketing semi-finished materials,
formed components, and value-added sub-assembled products utilizing the
properties exhibited by shape memory alloys, primarily those composed of Nickel
Titanium ("nitinol"). The Company also provides contract engineering services
to assist customers in the development of products based on the properties of
shape memory alloys. The Company sells its products and services primarily to
the medical device, telecommunications, aerospace and automotive industries.
The Company conducts its operations from its two operating facilities located in
Brookfield, Connecticut and Menlo Park, California. The Company acquired its
Menlo Park, California operations and certain assets therein from Raychem
Corporation ("Raychem") in June 1996. The Company's principal executive offices
are located at 57 Commerce Drive, Brookfield, Connecticut 06804, and its
telephone number at such address is (203) 740-7311.
TECHNOLOGY
Shape memory alloys ("SMAs") are advanced materials which possess the ability to
change their shape in response to thermal and mechanical changes, as well as the
ability to return to their original shape following deformations from which
conventional materials cannot recover. This ability results from the
transformation of the crystalline structure of the SMA in reaction to thermal
and mechanical changes. As a result of the crystalline structure changes, SMAs
are also able to produce forces many times greater than those produced by
conventional materials.
The major defining properties of the SMAs with which the Company works are
"superelasticity" and "thermal shape memory." The mechanical properties that
can be engineered into nitinol-based devices permit innovative product designs
that presently would be difficult or impossible to replicate with other
materials. Unlike ordinary metal, certain SMAs are capable of fully recovering
their shape after being deformed as much as six to eight percent, and of
performing this recovery on a repeated basis. This is more than ten times the
recovery ability of ordinary metals. This "superelasticity" feature has
applications for surgical instruments and devices, orthodontic apparatus,
cellular telephone antennae, and other devices. Thermal recovery applications
typically involve instances where a device is controlled or actuated in response
to a pre-determined thermal change. Examples of such uses include heat
activated coupling or sealing devices, valve actuation systems, and thermally-
actuated mechanical systems. The majority of today's commercial applications
involve the use of the materials' "superelastic" properties.
MARKETS
Medical Device Industry. Although the Company has expertise in a variety of
shape memory alloys, the Company utilizes primarily the superelastic
characteristic of nitinol for medical device applications. The value of
nitinol's superelastic characteristics in the medical device sector is its
ability to provide ease of access and delivery of sophisticated medical devices.
In addition, nitinol is kink resistant, exerts a constancy of force, is
biocompatible (non-toxic) and non-ferromagnetic, thereby allowing the use of
magnetic resonance imaging on patients with nitinol-based implants. Because of
these unique
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characteristics, nitinol is becoming integral to the design of a variety of new
medical products, its most significant use being in guidewires, catheters and
stents.
Guidewires and/or catheters, in this context, refer to tubes or wires inserted
into a vessel for diagnostic or therapeutic purposes. The guidewires and/or
catheters can be used in the delivery of medical devices, drugs or stents.
Because of the superelastic characteristic, together with other attributes of
nitinol described above, nitinol is replacing stainless steel as the material of
choice in many of these instruments.
Stents are small tubes that hold open arteries, veins and other passageways in
the body that have become obstructed as a result of disease, trauma or aging.
Stents are placed in the body using catheter-based delivery systems in minimally
invasive procedures. Once deployed, stents exert a radial force against the
walls of the vessel to enable these passageways to remain open and functional.
A number of different stent designs, materials and delivery systems, with
varying characteristics, are currently available. The three most prevalent
stent designs are lattice tubes made via laser cutting, coiled stents and wire
mesh stents. Stents, especially those used in the treatment of coronary artery
disease, have emerged as one of the fastest growing segments of the
medical device market. Stents are used increasingly as adjuncts or alternatives
to a variety of medical procedures because it is believed they are beneficial to
overall patient outcome and may, over time, reduce total treatment costs. From
its infancy in 1990, the stent market has grown to estimated worldwide sales of
approximately $1.3 billion in 1997.
Approximately 85% of the stents currently manufactured are stainless steel and
require deployment through the expansion of a balloon on a catheter-based
delivery system with a second balloon frequently used to further expand the
stent. However, the vast majority of those stents currently in clinical
development employ nitinol. The physical properties of nitinol allow placement
of stents manufactured with this metal to be self-expanding and avoids balloon
occlusion of the vessel during placement. Additionally, recent studies have
suggested that stainless steel stents create more extensive vascular injury and
are more thromobogenic than stents manufactured with nitinol.
Memry Corporation currently produces wire and tubing that is sold to medical
device companies for the production of guidewires, catheters and stents. In
fiscal 1998, wire sales to medical device companies accounted for approximately
9% of revenue while tube sales accounted for approximately 29% of revenue.
Medical sector sales, inclusive of the aforementioned wire and tube sales,
together with all other products sold to the medical device industry, accounted
for approximately 79% of revenue in the aggregate in fiscal 1998.
Non-Medical Markets. The non-medical industry sectors served by the Company
include primarily the telecommunications, aerospace/defense and automotive
industries. While the success of nitinol products in the medical device
industry is typically derived from the superelastic characteristics of nitinol,
applications in these industrial sectors employ both the superelastic and the
shape memory characteristics of nitinol. Although the development cycles in
these industries, particularly aerospace/defense and automotive, are longer than
those of the medical device sector, once the product is adopted it typically
provides for larger volume demand, is more easily leveraged into other
customers, and does not suffer from strict regulatory requirements.
Examples of such products the Company currently provide to these markets include
sealing devices, actuators, fasteners and cellular phone antennae. Memry
currently sells heat actuated sealing devices used in automotive engine systems
to maintain air pressure. The sale of these products accounted for
approximately 3% of Memry's fiscal 1998 revenue. Fasteners are products that
also employ the
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characteristics of shape memory to hold or couple two pieces of wire and/or
metal together. Sales of such fastening devices to the non-medical sector
accounted for approximately 3% of the Company's fiscal 1998 revenue. A
superelastic nitinol wire is sold as the element wire in retractable antennae
for portable cellular telephones. It has superior durability and quickly
recovers its straight shape when bending stresses are removed. The
superelasticity effect helps to avoid kinking and deformation. Memry's revenue
generated from the sale of cellular antennae wire represents approximately 12%
of fiscal 1998 revenue. Non-medical sector sales accounted for approximately
21% of fiscal 1998 revenues in the aggregate.
OPERATIONS
The Company conducts its business through two operating divisions. "Memry West,"
consisting of most of the business acquired from Raychem (the "Raychem
Acquisition") in June 1996, and "Memry East," which prior to the Raychem
Acquisition constituted the Company's entire SMA business.
Memry West. On June 28, 1996, the Company acquired Raychem's nickel-titanium
product line. This business utilized inventory, leasehold improvements,
machinery and equipment and patent and other intellectual property rights to
manufacture and sell SMAs primarily composed of nitinol. Prior to the Raychem
Acquisition, Raychem was both a supplier of nickel-titanium SMAs to the Company
and a competitor in certain markets (particularly in the medical market for
formed components). The acquired business differed from the SMA business of the
Company, however, in that where the Company had historically specialized in the
manufacture of finished products and formed components, Raychem specialized more
in the manufacture of semi-finished materials used by original equipment
manufacturers ("OEMs"). Not surprisingly, therefore, the point at which Memry
and Raychem most competed was at the level of formed component sales to OEMs,
particularly in the medical products industry. The leased facility, inventory,
machinery and equipment, leasehold improvements and know-how purchased from
Raychem now constitute Memry West, except that Raychem's operations relating to
the finishing of materials into sub-assembled products for sales to United
States Surgical Corporation were relocated to Memry East in December, 1996.
Memry West, located in Menlo Park, California, produces semi-finished SMAs in
three basic forms: wire, strip and tube. Memry West also produces formed
components.
Memry East. Memry East, located in the same facility as the Company's corporate
headquarters in Brookfield, Connecticut, is engaged in the production of formed
components and of valued-added sub-assemblies. Memry East is also involved in
contract engineering services, sponsored development programs in which the
Company gets paid not for the sale of products but for performing development
services.
PRODUCTS AND SERVICES
Contract Engineering Services. Memry is engaged in sponsored development
projects in which the Company designs, manufactures and sells prototype
components and products to customers. Memry is currently working on a number of
programs to develop SMA components for OEM customer's products. The Company
will accept customer-sponsored development contracts when management believes
that the
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customer is likely to order a successfully developed component or product in
sufficient quantity to justify the allocation of the engineering resources
necessary. Generally under such programs, the identity of the customer is
confidential; the data, inventions, patents and intellectual property rights
which specifically relate to the SMA component are either owned by the customer,
or, in several instances, shared between the Company and the customer; and data,
inventions, patents, and intellectual property rights pertaining to the SMA
technology that do not specifically relate to the customer's product are owned
by the Company.
Semi-Finished Materials. Raw nitinol material from specialty alloy suppliers is
processed into various shapes and sizes and referred to as "semi-finished"
materials. These materials, characterized generally as wire, strip or tubing,
are sold to customers in standard configurations, processed further to meet
specific customer specifications, or serve as the starting material for the
formed components produced by the Company.
Wire. Memry's nitinol wire products are sold as standard products,
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available in a variety of sizes, produced in non-standard sizes, to meet
specific customer requirements, and are used as the precursor to a formed
component. Memry produces wire with a diameter ranging from .004 to .250
inches. In addition, the Company may apply a variety of finishing
techniques, depending on customer specifications, including such steps as
polishing or coating. Applications for the Company's wire products include
cellular phone antennae, guidewires, endodontic files and
needles.
Strip. The Company's nitinol strip is sold in standard dimensions, as well
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as custom sizes as specified by the customer. Memry produces strip with a
thickness ranging from .001 to .01 inches and a width ranging from five to
twenty times the thickness. The majority of the strip product, however,
serves as the starting material for formed components made by Memry.
Example applications include the strip sold to OEMs for wrapping around
catheters for reinforcement of drainage catheters and biopsy forceps.
Tube. Nitinol tubing, or micro-tubing as it is sometimes called, is
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likewise sold in standard or customized sizes. Memry produces tubes with
an outside diameter ranging from .012 to .205 inches and an outside
diameter to internal diameter ratio from 1.15 to 1.70. Tubes are
typically used in applications requiring flexible shafts, pushability and
torqueability. Examples of such applications include stents, catheters,
delivery guides, needles, MRI instruments and surgical instruments.
Formed Components. Formed components are typically non-standard products.
Formed components are made by taking the semi-finished materials and further
processing by bending, kinking, stamping, crimping, laser cutting, chemical
etching, etc., into specific forms as specified by customers. Examples of
applications for formed components include the bending or arching of wire for
use as orthodontic braces, helical and strip actuators, patented locking rings
for electronic connectors, enabling components of medical instruments, and
sealing components.
Sub-Assemblies. Memry manufactures and sells value-added sub-assemblies to
OEMs. This comprises taking the semi-finished materials and/or formed
components produced by Memry and combining or assembling them with other
products that have been outsourced by Memry to form a larger component or "sub-
assembly" of the OEMs finished product. Memry combines its SMA expertise with
additional manufacturing and process knowledge and third-party supply chain
management to cost-effectively
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produce a sub-assembled product for OEMs. The single largest portion of Memry
East's business is selling assemblies and components to United States Surgical
Corporation ("USSC") and other medical industry OEMs. The primary item sold by
Memry to USSC is an SMA sub-assembly used by USSC for endoscopic instruments.
The use of superelastic SMAs allows the instruments to be constrained outside
the body, inserted into the body in its constrained form through small passages,
to then take a different shape while inside the body, and then to return to its
constrained shape for removal. While USSC was working with Memry on a number of
projects at the time of the Raychem Acquisition, the bulk of this business
represents selling finished medical sub-assemblies that Raychem manufactured at
a separate Menlo Park facility and sold to USSC prior to the Raychem
Acquisition.
Finished Products. Memry also manufactures, sells and markets proprietary
finished products from Memry East. These products include the MEMRYSAFE(R) line
of temperature-activated water flow reduction products and the FIRECHECK(R) line
of industrial fire safety valves. The Company does not believe that sales of
finished products will be material to the Company's operations in the
foreseeable future. On June 30, 1998 the Company sold its line of ULTRAVALVE
electronic combination shower/tube mixing valves for a promissory note in the
aggregate principal amount of $325,000 and a warrant to purchase up to a 15%
equity interest in the buyer.
STRATEGY
The Company's strategy has three components: to further Memry's leadership
position in the provision and processing of SMAs; to expand vertically in the
medical device industry by providing additional engineering and sub-assembly
services; and to leverage the Company's strong customer base by offering
additional complementary advanced material technology expertise and products.
Shape Memory Alloys. Memry's core business remains focused on its expertise in
shape memory alloys, specifically nitinol, with the objective of sustaining
growth in both the medical and non-medical markets. Because of the innovative
nature of the medical device industry, however, the Company has found the return
on invested development resources to be most attractive in the medical device
sector. The Company therefore focuses the majority of its engineering and
manufacturing expertise on the development of products for the medical device
markets, where the properties provided by SMA provide significant performance
advantages or, in many cases, represent the enabling component of the medical
device.
In cases where non-medical customers support the engineering and process
development expense and there is strategic interest on the part of Memry,
however, the Company will also undertake the development of non-medical
applications. In addition, the Company has in the past applied, and anticipates
in the future to apply, advancements made in the development of medical devices
to applications in the lower margin, higher volume non-medical sectors where
customers are not supporting development activities.
In order to continue to advance the Company's leadership position in SMAs the
Company has implemented the following initiatives:
Continued Advancements in Processing Expertise and Quality Assurance.
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Nitinol is a non-linear material, which makes it a very difficult material
to process. Memry believes that one of its significant competitive
advantages is its superior processing capabilities. One of these processes
is the production of tubes used primarily in the production of stents. The
Company believes that this process, proprietary to the Company, provides
Memry with a significant advantage over
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competitors with regard to product quality and cost. Memry has underway a
number of process enhancement initiatives, designed to enhance both the
current manufacturing processes and Memry's competitive position. Because
many of the materials produced by Memry are used in medical devices, the
product quality requirements placed on Memry by its customers are high.
Both Memry West's and Memry East's manufacturing facilities are ISO 9001
certified and Memry continues to pursue opportunities to further improve
its quality assurance.
Increase in Manufacturing Capacity. To meet growing demand, particularly
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in the medical device market for the production of tubes used for stents,
the Company has committed to optimizing the manufacturing efficiency of its
current facilities and to invest up to $2 million in capital equipment and
facility improvements in fiscal 1998.
Explore Potential Acquisitions. The Company expects to evaluate from time
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to time potential acquisitions. Potential acquisitions may include
investments in companies, technologies or products that complement the
Company's business or products or provide for expanded geographic presence.
Vertical Integration The medical device industry has been undergoing significant
change over the last few years. As part of that change, many of the larger
participants have recognized that their competitive differentiation comes from
two key elements: device design and product marketing. These are the core
competencies in which successful medical device companies excel and on which
many medical device companies are focusing their resources. As a result,
industry participants are looking to outsource to other companies with
specialized expertise some of the other essential parts of the business,
especially engineering incorporating advanced material technologies and
manufacturing processes. These factors have resulted in an increasing
outsourcing trend in the medical device industry, impacting the full breadth of
the manufacturing cycle from starting material engineering to final product
assembly. The market drivers for the outsourcing trend include:
Increased Competitive Pressures. Increased penetration by managed care
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companies and a continued focus on the cost of publicly sponsored
healthcare programs, such as Medicare and Medicaid, have resulted in
increasing pressure for lower priced procedures. This pricing pressure is
forcing medical device companies to reduce their manufacturing costs in
order to maintain margins.
Need to Shorten Device Development Cycles. To shorten the time required to
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market a new product, medical device companies are seeking to outsource
certain supply responsibilities to third parties that are able to quickly
develop cost effective solutions to engineering and manufacturing issues.
Efficient Use of Resources. Many medical device companies are reevaluating
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their business models with a focus on device design and sales and
marketing. As a result, medical device companies are increasingly
outsourcing many of the activities that traditionally were performed in-
house, including various aspects of the engineering, prototyping and pre-
production, as well as the manufacturing, of finished products and/or sub-
assemblies thereof.
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Memry recognizes these changes in the medical device industry and believes that
it can address this market opportunity. By combining a strong advanced
materials technological capability to assist medical device companies with
engineering skills that address issues involving the characteristics of SMAs, as
well as developing cost effective, high quality manufacturing processes and
supply chain relationships, Memry believes that it can alleviate these issues
for its OEM customers. The model for this type of relationship is represented in
Memry's association with US Surgical Corporation (see PRODUCTS AND
SERVICES--Sub-Assemblies).
In order to expand on this "one-stop" or "fully-integrated" service, the Company
has implemented the following:
Increase in Contract Engineering Capabilities. Memry possesses significant
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expertise in the characterization and performance of various SMAs. This
expertise is often critical in the design of medical devices. Although
Memry has in the past actively participated in the design of OEM customer
products, the Company has only recently begun a program to clearly
characterize and communicate to customers both the Company's capabilities
and the terms and conditions under which the Company will contract to
assist existing and potential customers through these services.
Processing of Additional Formed Components. As part of the Company's
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vertical integration strategy, the Company believes there exist additional
opportunities in the market to process semi-finished materials into formed
components in preparation for either further sub-assembly or direct sale to
OEM customers. This value-added business represents significant increased
margin opportunity and is often difficult for end-users to perform given
the intricacy of processing nitinol. Memry believes that in the past, lack
of both capital resources and sufficient personnel possessing the requisite
skills has hindered Memry's ability to capture this business. Memry has
during fiscal 1998 and will continue to identify, develop and market those
formed component capabilities it believes most promising in order to expand
this sector of its business.
Approach Existing and New Customers to Secure Sub-Assembly Business. The
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Company is currently undertaking an exercise to identify those resources
necessary to further advance its manufacturing and supply chain management
capabilities. These capabilities will be developed throughout the year and
communicated to new and existing customers as an additional service
provided by Memry. Currently the Company conducts cell manufacturing for
two significant customers. One of these sub-assemblies utilizes the
Company clean room environment, while the other is in the process of being
automated as the product enters the full production phase.
Additional Advanced Materials. Advanced materials that are stronger, lighter,
more effective, and smarter are fast becoming a reality in many markets. In
1997, the well respected Battelle Institute recognized advanced material
technologies as the second most important of its top ten strategic technologies
for the coming decade. Although Memry is currently focused on the opportunities
presented by SMAs, the Company believes both that there exist additional
advanced material technologies that would complement those currently advanced by
the Company and that these technologies would further leverage Memry's existing
customer base. Memry at present out-sources some advanced material technology
expertise in support of its current sub-assembly business. Although Memry has
no plans to do so at present, the Company believes that at some future date it
would benefit by acquiring additional advanced material technologies.
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MARKETING AND SALES
Sales to Raychem. In connection with the Raychem Acquisition, Memry and Raychem
entered into a Private Label/Distribution Agreement pursuant to which Raychem
was made Memry's exclusive distributor for the acquired product line in certain
specified fields of use for an initial term of five years (the "Private
Label/Distribution Agreement"). Sales by the Company to certain customers,
including United States Surgical Corporation, were excluded from the scope of
this Agreement, as were any future sales for all medical implant and certain
consumer recreational applications. Raychem's customers for the products sold
are cellular telephone antennae manufacturers who utilize the superelasticity of
SMAs for a more durable antennae, orthodontic manufacturers, who use SMA wire
for braces, medical products and instrument companies, whose uses of Memry's
products include catheter and guidewires, automotive manufacturers, who use SMA
plugs for high-pressure fuel injector sealant devices, and industrial product
manufacturers who use SMAs for a wide variety of other uses, including
electronic connectors. In addition, Raychem purchases some of Memry West's
components materials for its own use. The sales to Raychem under the agreement
are discounted from the ultimate resale price to OEMs in order to allow Raychem
to recover its sales and marketing expenses and to realize a profit upon resale
of such products to its customers (primarily OEMs). Almost all of the products
sold to Raychem are manufactured at Memry West.
Personnel. The Company currently has 5 sales and marketing personnel of which 3
operate primarily with Memry East and 2 operate primarily with Memry West. The
Company's arrangements with Raychem permit the Company to keep its internal
sales force to a minimum as it need only focus upon areas not covered by the
Private Label/Distribution Agreement (principally, medical implant and consumer
uses).
Material Customers. The Company's two largest customers, Raychem and United
States Surgical Corporation, represented 44% and 38%, respectively, of the
Company's sales during 1998. Obviously, the loss of either such customer could
have a material adverse effect on the Company. This risk, however, is lessened
by the Company's relationship with these customers. The Company and Raychem are
party to the Private Label/Distribution Agreement, which requires Raychem to
purchase certain products and materials solely from the Company until June 30,
2001. Furthermore, while there can be no assurances that Raychem will continue
to purchase products at its current rate, Raychem distributes the components its
purchases from Memry to over two hundred customers worldwide, lessening the risk
that the loss of any one customer will have a material adverse effect on
Raychem's purchases from Memry. In addition, in April 1997 the Company received
a two-year exclusive blanket purchase order from United States Surgical
Corporation for the supply of medical instrument assemblies, commencing April 1,
1997. The estimated value of such shipments is expected to exceed $4 million
during the first nine months of fiscal 1999. The sub-assembly covered by this
agreement was acquired by the Company as part of the Raychem Acquisition.
SOURCES OF SUPPLY
The principal raw material used by the Company is SMA alloys. The Company
obtains its SMA alloys from two principal sources: Teledyne Wah Chang, of
Albany, Oregon; and Special Metals Corporation of New Hartford, New York. The
Company expects to be able to continue to acquire shape memory alloys in
sufficient quantities for its needs from these suppliers. In addition, if the
Company was for whatever reason not able to secure an adequate supply of SMA
from these suppliers, the Company
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believes that other sources exist that would be able to supply the Company with
sufficient quantities of SMA alloys, although the Company could suffer some
transitional difficulties if it had to switch to such alternative sources.
While the Company also relies on outside suppliers for its non-SMA components of
sub-assembled products, the Company does not anticipate any difficulty in
continuing to obtain non-SMA raw materials and components necessary for the
continuation of the Company's business.
COMPETITION
The Company faces competition from other SMA processors, who compete with the
Company in the sale of semi-finished materials (i.e. mostly with Memry West) and
formed components (i.e., with both Memry East and Memry West). There are
several major U.S., Japanese and European companies engaged in the supply or use
of SMAs, some of which have substantially greater resources than the Company.
Within the U.S., the two major SMA alloy suppliers to both the Company and the
industry as a whole are Teledyne Wah Chang and Special Metals Corporation. Each
of these companies has substantially greater resources than the Company and
could determine that it wishes to compete with the Company in the Company's
markets. Special Metals has in fact become a competitor of Memry West for semi-
finished wire and strip materials. Japanese competitors include Furakawa
Electric Co. and Daido, both of which produce SMAs and sell to users in Japan
and internationally. The principal European competitors are AMT, a unit of the
SwissMetal group of companies, and G. Rau/EuroFlex, a German company. Within
North America, the Company believes that it is the largest single processor of
SMAs, accounting for approximately 35% of all SMA usage. The Company believes
that Johnson and Johnson, through its subsidiary Nitinol Devices and Components
Company, are the next largest, followed by Flexmedics, SMA Applications, Inc.,
and Nitinol Medical Technology.
Memry East is, pursuant to a purchase order running through March 31, 1999, the
exclusive supplier to United States Surgical Corporation of Memry East's single
most important product line, the Endocatch sub-assembly.
The Company intends to compete, and advance its position, based upon its
worldwide sales and distribution alliance with Raychem Corporation, its
proprietary alloy positions, and its knowledge of the processing parameters of
the alloys and unique design and assembly capabilities, particularly in the
medical device field. While price and production capability are obviously
important, the Company believes that it competes mostly on technological
capabilities.
PATENTS AND TRADEMARKS
As part of the Raychem Acquisition, the Company controls five U.S. patents, as
well as a variety of foreign patents and domestic and foreign patent
applications, relating primarily to the production and utilization of nickel-
titanium alloys having superelasticity and shape memory effect. While these
acquired patents in no way dominate the entire field of shape memory metals,
they do provide the Company with some competitive advantages in the covered
uses. In addition, notwithstanding the Company's acquisition of these patents
and patent applications as part of the Raychem Acquisition, under certain
circumstances the Company will be required to license the acquired intellectual
property back to Raychem for specified uses. For example, (i) upon the
termination of the private/label distribution agreement between the Company and
Raychem, Raychem will have a non-exclusive perpetual license to utilize these
patents to sell products within specified fields of uses for a specified
royalty, and (ii) Raychem has a non-exclusive,
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transferable perpetual license to utilize these patents in connection with
certain intellectual property relating to the medical products market that was
not acquired by the Company as part of the Raychem Acquisition. The Company
believes that this latter license may have been transferred to Medtronics, Inc.,
a medical products manufacturer (and a customer of the Company), when Medtronics
purchased this "excluded" (from the Raychem Acquisition) intellectual property
from Raychem during fiscal 1997. The Company also has various other patents and
trademarks which, while useful, are not individually material to the Company's
operations.
The Company's patent rights do not dominate the field of SMA utilization,
although the patents acquired from Raychem do dominate the use of nickel-
titanium alloys having a two-way shape memory effect, although not in the
medical instrument and in-body applications fields. The Company does not,
however, have specific patent protection for its most important present products
or product components. The Company's patent rights obviously do not dominate
any specific fields in which the Company sells products. The Company does
believe, however, that various patents provide it with advantages in the
manufacture and sale of different products, and that its know-how relating to
various SMA alloys provides the Company with a competitive advantage.
While a U.S. patent is presumed valid, the presumption of validity is not
conclusive, and the scope of a patent's claim coverage, even if valid, may be
less than needed to secure a significant market advantage. Gaining effective
market advantage through patents can require the expense, uncertainty and delay
of litigation. Although the Company's technical staff is generally familiar
with the SMA patent environment and has reviewed patent searches when considered
relevant, the Company has not requested any legal opinion to determine whether
any of its current or contemplated products would infringe any existing patents.
RESEARCH AND DEVELOPMENT
During fiscal 1998, the Company spent approximately $226,000 on "pure" research
and development (i.e., research and development done by the Company at its own
cost for purposes of developing future products). In comparison, the Company
spent approximately $125,000 during fiscal 1997 on "pure" research and
development. The Company anticipates modest increases in the amount of "pure"
research and development that it undertakes as the Company's growth continues.
In addition, the Company spent approximately $187,000 on "funded" research
contributing to the development of SMA components pursuant to customer and
government-sponsored development arrangements. These "funded" research and
development costs are borne directly by the federal government and customers of
the Company, as applicable, and, for purposes of the Company's financial
statements, are part of "costs of goods sold," rather than research and
development. By comparison, the Company spent approximately $212,000 on
"funded" research and development in fiscal 1997, which amount was accounted for
as "costs of goods sold". The amount of "funded" research and development that
the Company will undertake in the future will depend upon its customer's needs,
but the Company anticipates it increasing over time as the use of SMAs for
various purposes increases.
EMPLOYEES
As of June 30, 1998, the Company had 99 full-time employees and 1 part-time
employee. Of the full-time employees, 12 were executive or management personnel
and 31 were science and research personnel.
10
<PAGE>
None of the employees is represented by collective bargaining units. The Company
believes that its relationship with its employees is generally good.
In addition, as of June 30, 1998, the Company had approximately 14 "temporary"
employees (i.e., employees of temporary manpower companies) working for the
Company.
DISCONTINUED OPERATIONS
Until June of 1997, the Company reported as a separate segment in its financial
reports the results of Wright Machine Corporation ("Wright"), a wholly-owned
subsidiary of the Company with a 120-year history as a New England manufacturer
of screw machine and taper pin products. Wright provided these products to OEMs
in the plumbing, electrical, electronic, fire protection, valve, appliance and
automotive markets through both direct sales accounts and three manufacturers'
representatives. Within the overall activity of Wright, there were three basic
business segments: (i) the manufacture of threaded rings for the plumbing
industry; (ii) the manufacture of predominantly brass parts on screw machines
ranging in size between 1.5 inches to 2.5 inches; and (iii) the manufacture of
custom and standard taper pins, most of which were made of various grades of
stainless and carbon steel.
After a prolonged period of declining sales and ongoing operating losses, the
Company's Board of Directors voted to cease operation at Wright, and proceed
with Wright's orderly liquidation, in April, 1997. Wright proceeded to cease
manufacturing operations, and sell its machinery and equipment, in June of 1997.
The Company recorded a loss of $211,000 in fiscal 1997 on Wright's sales and
liquidation, and a further loss of $151,000 in fiscal 1998. Wright's assets
have at this point been substantially liquidated, except that Wright's real
property, while currently listed for sale, has not yet been sold. Wright's
assets and results from operations are now shown on Memry's financial statements
under the captions of "Assets of Discontinued Segment, Net" and "Discontinued
Operations." See "Item 7 -- Financial Statements"
Item 2. DESCRIPTION OF PROPERTY
The Company has a lease, which was renewed as of September 30, 1995, for a term
to expire on February 1, 2001, for office and manufacturing space located at 57
Commerce Drive, Brookfield, Connecticut 06804. The premises have a floor area
of approximately 24,350 square feet, of which approximately 6,500 square feet is
used by the Company for general administrative, executive, and sales purposes,
and approximately 17,850 square feet is used for engineering, manufacturing,
research and development operations and an environmentally controlled area
("clean room"). The lease provides for an average monthly base rental of
approximately $12,350.
On March 26, 1998, the Company, as sublessee, and Raychem, as sublessor, amended
the sublease relating to office and manufacturing space located at 4065 Campbell
Avenue, Menlo Park, California 94025 to extend the term of such sublease to
September 30, 2001. These premises, formerly used by Raychem, are the site of
the Company's west coast operations. These premises have a floor area of
approximately 28,032 square feet, which is used by the Company for
manufacturing, warehousing, general administrative and research and development
operations. The lease originally provided for a monthly base rental of
$20,743.68, which amount was raised in October of 1998 to approximately $43,500
(which amount is presently in effect), due to an adjustment for increases in the
fair market value of the premices.
11
<PAGE>
Wright owns approximately 2.9 acres of land, together with manufacturing and
office facilities, located at 69 Armory Street, Worcester, Massachusetts. Three
buildings have an aggregate floor area of approximately 85,000 square feet.
Wright has listed this property for sale with a broker as part of its
liquidation and is presently in negotiations with a potential purchaser.
However, Wright has not yet entered into a contract with such purchaser.
Management believes that the existing facilities of the Company are suitable and
adequate for the Company's present needs and that additional facilities will be
readily available if needed. Management also believes that the properties are
adequately covered by insurance.
Item 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, none of which are believed
to involve a claim for damages exceeding 10% of the current assets of the
Company. Although it is not feasible to predict the outcome of any such
proceedings, or any claims made against the Company, the Company does not
anticipate that the ultimate liability, if any, will materially affect the
Company's financial position, results of operation or liquidity/cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the OTC Bulletin Board (through which
various market dealers make the market of the Company's Common Stock and trades
are reported through what is commonly known as the "pink sheets") under the
symbol MRMY. On June 30, 1998, there were 1,473 holders of record of the
Company's Common Stock.
The following table sets forth, for the periods indicated, the quarterly high
and low representative bid quotations for the Company's Common Stock as reported
by the National Quotations Bureau. Quotations reflect inter-dealer prices,
without retail mark-ups, mark-downs, or commissions, and may not necessarily
represent actual transactions.
Fiscal year ended
June 30 1998 1997
- ----------------- ---- ----
High Low High Low
---- ---- ----- -----
1st Quarter 2.56 1.63 $2.06 $1.31
2nd Quarter 4.44 2.94 1.94 1.50
3rd Quarter 4.19 3.25 1.94 1.13
4th Quarter 4.94 3.63 1.94 1.19
12
<PAGE>
The Company has never paid a cash dividend on its Common Stock and the Company
does not contemplate paying any cash dividends on its Common Stock in the near
future.
Pursuant to the Company's June 30, 1998 loan agreement with its principal
lender, the Company is prohibited from declaring or paying any dividends, or
making a distribution to its stockholders, until the termination of such
agreement and the repayment of all amounts due to such lender.
On June 29, 1998, the Company issued 900,000 shares of its Common Stock to
Connecticut Innovations, Inc. upon the exercise of warrants held by Connecticut
Innovations, Inc. at an aggregate exercise price of $747,400. Such sale was
exempt from registration pursuant to the terms of Section 4(2) of, and
Regulation D under, the Securities Act.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations.
Revenues. Revenues from continuing operations increased 65% for the fiscal year
ended June 30, 1998, to $19,077,000 from $11,545,000 for the fiscal years ended
June 30, 1998 and 1997, respectively. The increase of $7,532,000 is primarily
due to additional sales to Raychem pursuant to the Private Label/Distribution
Agreement with Raychem, additional sales to Raychem as an OEM, additional sales
of sub-assemblies to United States Surgical Corporation and additional sales of
SMA products for various medical applications. The Company expects revenues to
continue to increase in future years.
Costs and Expenses. Manufacturing costs increased from $6,517,000 in fiscal 1997
to $9,453,000 in fiscal 1998, an increase of $2,936,000, or 45%. This increase
was entirely attributable to the 65% increase in revenues. The Company's gross
margins from sales increased to 50% for fiscal 1998, compared to 44% for fiscal
1997, as a result of both increased efficiencies from greater sales volume and a
change in the Company's product mix from non-medical and consumer products and
towards higher margin medical industry products. As a result, the Company's
gross profit from sales increased by $4,596,000, or over 91%, from $5,028,000 in
fiscal 1997 to $9,624,000 in fiscal 1998.
General, selling and administrative ("GSA") expenses increased to $6,241,000 in
fiscal 1998 from $5,023,000 in fiscal 1997, an increase of $1,218,000 or 24%.
The increase in GSA expenses is entirely due to the larger size of the Company
and its operations. The 24% growth in GSA expenses compared to a 65% growth in
revenue is primarily attributable to increased efficiencies from larger size and
the elimination in fiscal 1998 of certain non-recurring expenses in fiscal 1997
that related to the consummation of the Raychem Acquisition at the end of fiscal
1996. Depreciation and amortization expenses increased to $406,000 in fiscal
1998 from $228,000 in fiscal 1997, an increase of $178,000, or 78%. The
increase in depreciation and amortization costs was due to the write down of
deferred financing costs on debt repaid in fiscal 1998 and a full year of
depreciation expense related to equipment that was acquired during fiscal 1997.
Interest expenses decreased from $275,000 in fiscal 1997 to $163,000 in fiscal
1998, a decrease of $112,000, or 41%. This decrease arose from both a decrease
in the Company's average outstanding borrowings during fiscal 1998 and a
decrease in the interest rate paid by the Company.
13
<PAGE>
Net Income/Loss. As a result of the Company's 65% increase in revenues, along
with proportionately smaller increases in manufacturing costs and SGA expenses,
and a decrease in interest expense, the Company achieved income from continuing
operations of $3,076,000 during fiscal 1998, as compared to a loss from
continuing operations of $260,000 in fiscal 1997. The Company expects income
from continuing operations to increase in future periods as sales continue to
increase.
Factoring in the loss from discontinued operations, the Company had net income
of $2,925,000 during fiscal 1998, as compared to a net loss of $1,011,000 during
fiscal 1997, an increase of $3,936,000. This improvement results from increased
sales and efficiencies, as well as the elimination of both discontinued
operations and special non-recurring expenses during 1998.
Liquidity and Capital Resources
The Company's primary capital requirements through early fiscal 1997 were to
fund losses from operations. In addition, from time to time the Company has
required capital to effect acquisitions and to fund increases in inventory for
certain products necessary to allow the Company to increase sales for those
products. The Company has historically satisfied its capital requirements from
sales of equity securities and borrowings. However, the Company does not
anticipate that it will require capital to fund operations going forward. During
fiscal 1998, net cash provided by operating activities was approximately $1.7
million, net cash used by financing activities was approximately $497,000 and
net cash used by investing activities was approximately $29,000. As a result of
the foregoing, the Company held cash and cash equivalents at June 30, 1998 of
$1,189,000, up from $25,000 at the close of fiscal 1997. The Company had
positive working capital (current assets less current liabilities) of $5,295,000
at the close of fiscal 1998, as opposed to a working capital deficit (current
liabilities less current assets) of approximately $15,000 at the end of fiscal
1997.
On June 30, 1998, the Company and Webster Bank entered into a Commercial
Revolving Loan, Term Loan, Line of Credit and Security Agreement and related
financing documents and agreements (the "Webster Facility"). Upon entering into
the Webster Facility, the Company paid off all amounts outstanding under its
prior credit facility with First Union National Bank. The Webster Facility
includes a revolving loan, an equipment loan line of credit and a $500,000 term
loan. The term loan is to be repaid in equal monthly installments of principal
over its five year term. The revolving loan provides for borrowings up to the
lesser of (a) $3,000,000 or (b) an amount equal to the aggregate of (1) 80% of
eligible accounts receivable and (2) the lesser of $750,000 or 35% of eligible
inventory. The revolving loan requires the payment of a commitment fee equal to
.25% per annum of the daily unused portion of the revolving loan. The equipment
loan line of credit provides for equipment financing up to the lesser of
$750,000 or 75% of the purchase price for eligible equipment each year through
June 30, 2001. The Company has the option of converting amounts borrowed under
the equipment line of credit to term loans on July 1, 1999, 2000, and 2001. At
August 31, 1998, an aggregate of approximately $485,000 thousand was outstanding
under the Webster Facility. The Webster Facility is secured by substantially all
of the Company's assets.
Interest on the revolving loan and equipment line of credit is variable based on
either LIBOR or the Prime Rate as published in the Wall Street Journal, as
elected by the Company. Interest on the term loan and converted equipment loans
is either fixed, at a rate based on the U.S. Treasury yield, or variable based
on the Prime Rate, as elected by the Company. The Company has the ability to
convert between the different rates from time to time subject to certain
conditions.
14
<PAGE>
In addition, the credit facility contains various restrictive covenants,
including, among others, limitations on encumbrances and additional debt,
prohibition on the payment of dividends or redemption of stock except in
connection with certain existing put rights, restrictions on
management/ownership changes and required compliance with specified financial
ratios.
The Company has in the past grown through acquisitions (including both the
Raychem Acquisition and the Company's earlier acquisition of Wright) and, as
part of its continuing growth strategy, the Company expects to continue to
evaluate and pursue opportunities to acquire other companies, assets and product
lines that either complement or expand the Company's existing businesses. The
Company intends to use available cash from operations and authorized but
unissued common stock to finance any such acquisitions.
The Company intends to spend between $1.5 and $2.0 million on capital
expenditures during the fiscal year ending June 30, 1998, in order to handle its
expected continuing increased sales volume of SMA materials. The Company
expects that it will be able to pay for these expenditures out of cash flow
generated from its sale of products during the current fiscal year.
In connection with a December 1994 subordinated debt financing, the Company
granted Connecticut Innovations, Incorporated ("CII"), currently the holder of
both common stock and warrants of the Company, a "put" right if: (i) at any time
before the earlier of June 28, 2006 and the date on which CII ceases to hold at
least 35% of the common stock underlying the convertible securities originally
issued to it, the Company ceases to (a) maintain its corporate headquarters and
all of its product business operations in the State of Connecticut (including
the assembly of all products to be sold to U.S. Surgical Corporation), excluding
the Company's components and sub-assembly business acquired from Raychem, (b)
base its president and chief executive officer, a majority of its senior
executives, and all of its administrative, financial, research and development,
marketing and customer service staff relating to its product business (subject
to the same inclusions and exclusions as clause (a)) in the State of
Connecticut, (c) conduct all of its operations relating to its product business
directly or through subcontractors and through licensed operations in the State
of Connecticut (subject to the same inclusions and exclusions as clause (a)),
and (d) maintain its principal bank accounts with banks located in the State of
Connecticut; or (ii) the Company fails to keep the Registration Statement on
Form S-2 that went effective on January 31, 1997 (the "Registration Statement"),
covering the offer and sale by certain of the Company's shareholders (including
CII) of up to 3,550,630 shares (including up to 3,041,963 shares beneficially
owned at such time by CII) of the Company's common stock, in effect for an
aggregate of 120 days during any rolling twelve month period during the three
years which the Company is required to maintain the effectiveness of the
Registration Statement. Upon CII's exercise of its put, the Company shall be
obligated to purchase from CII all the Company's Common Stock then owned by CII
and underlying warrants then owned by CII at a price equal to the greater of the
then current market price of the Company's common stock or $2.00 per share,
less, in either event, the aggregate amount of unpaid exercise prices of all
warrants put to the Company. Using $4.50 per share, which was the approximate
market price at June 30, 1998, as the put price per share, the aggregate put
price that would have to be paid by the Company if the put were exercised would
be approximately $8,450,000. To the extent that the current market value of the
Company's common stock exceeds $4.50 per share at any time, the put price would
be greater. If CII were to have the right to put its securities and were to
choose to exercise that right, it would have a serious adverse effect on the
Company's liquidity and the Company would most likely have to seek equity
financing to be able to meet its obligations to CII. However, the Company
believes that it has the ability to insure that its operations do not move from
Connecticut in a manner that
15
<PAGE>
would trigger CII's put, and the Company intends to cause the Registration
Statement to be maintained in a manner that would prevent CII's put from being
operative.
The Company believes that the combination of its working capital surplus, its
improved borrowing facility, its ability to raise equity capital in the past and
what it believes will be material net profits from operations during fiscal 1999
will be sufficient to meet the Company's capital requirements during fiscal
1999.
YEAR 2000 ISSUE
The "Year 2000 Issue" results from computer programs being written using two
digits, instead of four, to define a given year. Programs running time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in disruptions to various activities and
operations, miscalculations and even system failures.
The Company has recently upgraded all of its internal computer systems such that
the Company believes all of such internal systems are Year 2000 compliant. The
Company has not, however, formally tested such new systems, completed its
investigation or developed a plan regarding the Year 2000 readiness of its other
equipment or begun to inquire of its suppliers and customers as to whether the
Year 2000 Issue will create substantial risks or disruption. The Company
believes that the cost of undertaking such an investigation and developing and
effecting such a plan will be less than $50,000. The Company has not reserved
funds for such costs and, therefore, such costs, if expended, will have a direct
negative impact on the Company's future income.
The Company plans to initiate a Year 2000 investigation and develop such a Year
2000 plan by the end of the second quarter of fiscal 1999 and to complete such
investigation and effect such plan before the end of fiscal 1999. As part of
the Company's Year 2000 investigation, the Company plans to seek third-party
confirmations with respect to such third-party's computers, software and
systems. The Company also plans to review all of its equipment (other than its
recently upgraded computer systems) to determine what, if any, Year 2000
concerns exist and then to address any material concerns.
Based upon preliminary data, the Company does not believe that the Year 2000
Issue will have a material adverse impact on the Company's financial condition,
results of operation or future cash flows. If, however, the Company determines
through its investigation that its suppliers, customers and other third parties
with whom the Company maintains business relations will be unable to resolve any
arising Year 2000 problems in a timely manner, risk to the Company's financial
condition could result. In addition, in the event that the economy as a whole is
materially and adversely effected by widespread disruptions, or by failures of
key infrastructure providers (such as banks and utilities), it is likely that
the Company's financial condition and results of operations would be materially
adversely effected.
FORWARD-LOOKING INFORMATION
The statements in this Annual Report on Form 10-KSB that are not historical fact
constitute "forward-looking statements." Said forward-looking statements
involve risks and uncertainties which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements, express or implied by such forward-looking
statements.
These forward-looking statements are identified by their use of forms of such
terms and phrases as "expects," "intends," "goals," "estimates," "projects,"
"plans," "anticipates," "should," "future," "believes," and "scheduled".
16
<PAGE>
The variables which may cause differences include, but are not limited to, the
following: general economic and business conditions; competition; success of
operating initiatives; operating costs; advertising and promotional efforts; the
existence or absence of adverse publicity; changes in business strategy or
development plans; the ability to retain management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs;
availability and costs of raw materials and supplies; and changes in, or failure
to comply with, government regulations. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this filing will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and expectations of the Company will be achieved.
17
<PAGE>
Item 7. FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-1
- -----------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets F-2
Consolidated statements of operations F-3
Consolidated statements of stockholders' equity F-4
Consolidated statements of cash flows F-5
Notes to consolidated financial statements F-6
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Memry Corporation and Subsidiary
Brookfield, Connecticut
We have audited the accompanying consolidated balance sheets of Memry
Corporation and subsidiary as of June 30, 1998 and 1997, and the related
consolidated statements of operations, 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Memry Corporation
and subsidiary as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 128 on December 31, 1997
which established new standards for the computation, presentation and disclosure
of earnings per share.
New Haven, Connecticut
September 2, 1998
F-1
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------
<S> <C> <C>
ASSETS (Note 4)
Current Assets
Cash and cash equivalents $ 1,189,000 $ 25,000
Accounts receivable (Note 6) 3,534,000 2,419,000
Note receivable 325,000 -
Inventories (Note 2) 2,336,000 1,664,000
Prepaid expenses and other current assets 62,000 369,000
Assets of discontinued segment, net (Note 11) 210,000 936,000
---------------------------------------
TOTAL CURRENT ASSETS 7,656,000 5,413,000
---------------------------------------
Equipment and Improvements, net (Notes 3 and 8) 2,717,000 2,765,000
---------------------------------------
Other Assets
Patents and patent rights, less accumulated amortization of $328,000
in 1998 and $194,000 in 1997 1,734,000 1,868,000
Goodwill, less accumulated amortization of $138,000 in 1998
and $70,000 in 1997 906,000 974,000
Deferred financing costs 43,000 103,000
Deposits 29,000 29,000
---------------------------------------
2,712,000 2,974,000
---------------------------------------
$ 13,085,000 $ 11,152,000
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 2,230,000 $ 3,144,000
Notes payable (Note 4) 100,000 2,255,000
Current maturities of capital lease obligations (Note 8) 31,000 29,000
---------------------------------------
TOTAL CURRENT LIABILITIES 2,361,000 5,428,000
Capital Lease Obligations, less current maturities (Note 8) 19,000 43,000
Notes Payable, less current maturities (Note 4) 580,000 -
---------------------------------------
2,960,000 5,471,000
---------------------------------------
Commitments and Contingencies (Notes 8 and 10)
Stockholders' Equity (Note 5)
Common stock 199,000 170,000
Additional paid-in capital 41,121,000 39,631,000
Accumulated deficit (31,195,000) (34,120,000)
---------------------------------------
10,125,000 5,681,000
---------------------------------------
$ 13,085,000 $ 11,152,000
=======================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1998 1997
-------------------------------------
<S> <C> <C>
Revenues
Product sales (Note 6) $ 18,847,000 $ 11,290,000
Research and Development 230,000 255,000
-------------------------------------
19,077,000 11,545,000
-------------------------------------
Cost of Revenues
Manufacturing 9,266,000 6,305,000
Research and development 187,000 212,000
-------------------------------------
9,453,000 6,517,000
-------------------------------------
GROSS PROFIT 9,624,000 5,028,000
-------------------------------------
Operating Expenses
General, selling and administrative (Note 8) 5,835,000 4,795,000
Depreciation and amortization 406,000 228,000
-------------------------------------
6,241,000 5,023,000
-------------------------------------
OPERATING INCOME 3,383,000 5,000
-------------------------------------
Other Income (Expense)
Interest expense (Note 4) (163,000) (275,000)
Gain on disposition of assets 16,000 10,000
-------------------------------------
(147,000) (265,000)
-------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 3,236,000 (260,000)
Provision for income taxes 160,000 -
-------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 3,076,000 (260,000)
Discontinued Operations (Note 11)
Loss from operations of discontinued segment -- (680,000)
Loss on disposal of discontinued segment (151,000) (211,000)
Extraordinary gain on early retirement of debt (Note 4) -- 140,000
------------------------------------
LOSS FROM DISCONTINUED OPERATIONS (151,000) (751,000)
------------------------------------
NET INCOME (LOSS) $ 2,925,000 $ (1,011,000)
=====================================
Basic earnings per share:
Income (loss) from continuing operations $ 0.17 $ (0.02)
Loss from discontinued operations (0.01) (0.04)
-------------------------------------
$ 0.16 $ (0.06)
=====================================
Diluted earnings per share:
Income (loss) from continuing operations $ 0.15 $ (0.02)
Loss from discontinued operations (0.01) (0.04)
-------------------------------------
$ 0.14 $ (0.06)
=====================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
========================================================================================================================
Preferred Stock Common Stock
------------------------------------------------
Additional
Shares Par Shares Par Paid-in Accumulated
Issued Value Issued Value Capital Deficit
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 364 $ 36,000 12,977,854 $ 130,000 $ 39,034,000 $ (33,109,000)
Issuance of common stock - - 388,620 3,000 495,000 -
Series G preferred stock converted (297) (29,000) 2,971,000 30,000 - -
Series H preferred stock converted (67) (7,000) 668,000 7,000 - -
Issuance of warrants - - - - 152,000 -
Direct stock offering costs - - - - (50,000) -
Net loss - - - - - (1,011,000)
--------------------------------------------------------------------------------
Balance, June 30, 1997 - - 17,005,474 170,000 39,631,000 (34,120,000)
Issuance of common stock - - 1,280,781 13,000 1,472,000 -
Issuance of warrants - - - - 34,000 -
Warrants exercised through net
settlement and issuance of common
stock - - 1,662,914 16,000 (16,000) -
Net income - - - - - 2,925,000
--------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 - $ - 19,949,169 $ 199,000 $ 41,121,000 $ (31,195,000)
================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1998 1997
--------------------------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income (loss) $ 2,925,000 $ (1,011,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 873,000 723,000
Gain on early retirement of debt (140,000)
Gain on disposal of assets (16,000) (1,071,000)
Writedown of assets of discontinued segment 200,000 470,000
Compensation paid by issuance of common stock 234,000 229,000
Change in operating assets and liabilities:
Increase in accounts receivable (879,000) (2,069,000)
Increase in note receivable (325,000)
Increase in inventories (334,000) (48,000)
Decrease (increase) in prepaid expenses and other current assets 89,000 (96,000)
Increase in other assets (43,000) (80,000)
(Decrease) increase in accounts payable and accrued expenses (1,034,000) 1,622,000
Decrease in unearned revenue - (150,000)
--------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,690,000 (1,621,000)
--------------------------------------
Cash Flows from Investing Activities
Purchase of shape memory metals operation - (56,000)
Purchases of equipment (521,000) (202,000)
Proceeds from sales of equipment 24,000 1,096,000
--------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (497,000) 838,000
--------------------------------------
Cash Flows from Financing Activities
Proceeds from sale of common stock, net 1,516,000 72,000
Proceeds from notes payable 500,000 1,146,000
Net (decrease) increase in revolving loans payable (1,173,000) 972,000
Principal payments on notes payable (842,000) (1,421,000)
Principal payments on capital lease obligations (30,000) (18,000)
--------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (29,000) 751,000
--------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,164,000 (32,000)
Cash and cash equivalents, beginning of year 25,000 57,000
--------------------------------------
Cash and cash equivalents, end of year $ 1,189,000 $ 25,000
======================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 239,000 $ 257,000
======================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock in settlement of debt $ 60,000 $ -
======================================
Issuance of 1,662,914 shares of common stock in net settlement of
2,370,000 common stock warrants $ 16,000 $ -
======================================
Capital lease obligation incurred for equipment $ 8,000 $ 83,000
======================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
- ------------------
Memry Corporation, a Delaware corporation incorporated in 1981, is engaged in
the businesses of developing, manufacturing and marketing products and
components utilizing the properties exhibited by shape memory alloys, and, prior
to June 5, 1997, manufacturing and marketing metal parts and components machined
on screw machines and smaller metal working machines. As described in Note 11,
the Company ceased the operations of the metal parts and components operations
on June 5, 1997. The Company's sales are primarily to customers in the medical
device industry located throughout the United States. The Company extends credit
to its customers all on an unsecured basis on terms that it establishes for
individual customers.
Accounting estimates
- --------------------
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of consolidation
- ----------------------------
The financial statements include the accounts of Memry Corporation ("Memry") and
Wright Machine Corporation ("Wright"), its wholly-owned subsidiary
(collectively, the "Company"). All significant intercompany transactions have
been eliminated in consolidation.
Cash and cash equivalents
- -------------------------
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments with a maturity of three months or less, when
purchased, to be cash equivalents. The carrying amount of these financial
instruments approximates fair value because of the short maturity of these
instruments.
Inventories
- -----------
Inventories consist principally of various metal alloy rod and shape memory
alloys. Inventories are stated at the lower of cost, determined on the first-
in, first-out method, or market.
F-6
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
Impairment of assets
- --------------------
The Company reviews its long-lived assets and certain identifiable intangible
assets for impairment whenever events or circumstances indicate that the
carrying amount of the assets may not be recoverable.
Revenue recognition
- -------------------
Revenues from product sales are recognized when the related products are
shipped. Certain revenues are earned in connection with research and
development contracts which are principally with the U.S. Government. Such
revenues are recognized when services are rendered. Some of the Company's
research and development projects are customer-sponsored and typically provide
the Company with the production rights or pay a royalty to the Company if a
commercially viable product results.
Depreciation and amortization
- -----------------------------
Depreciation of equipment is computed using the straight-line method over the
estimated useful lives of the respective assets, ranging from three to thirty
years. Leasehold improvements are amortized over the life of the lease, or the
improvements' estimated useful life, if shorter.
Costs of obtaining patents and patent rights are amortized using the straight-
line method over the patents' expected period of benefit which ranges from
thirteen to sixteen years.
Goodwill represents the cost of acquired assets in excess of values ascribed to
net tangible assets and is being amortized using the straight-line method over
15 years.
Costs incurred in obtaining financing are capitalized and are being amortized
over the term of the related debt.
401(k) plan
- -----------
The Company maintains a 401(k) profit sharing and savings plan for the benefit
of substantially all its employees. The plan provides for contributions by the
Company in such amounts as the Board of Directors may annually determine.
F-7
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
Income taxes
- ------------
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws on the date of enactment.
Earnings per share
- ------------------
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128"), which supersedes APB Opinion No. 15.
SFAS No. 128 requires the presentation of earnings per share by all entities
that have common stock or potential common stock, such as options and warrants,
outstanding and which trade in a public market. The Company now presents basic
earnings (loss) per share and diluted earnings (loss) per share in its
consolidated statements of operations. Basic earnings (loss) per share amounts
are computed by dividing income (loss) from continuing and discontinued
operations by the weighted-average number of common shares outstanding. Diluted
per-share amounts assume exercise of all potential common stock instruments
unless the effect is to reduce the loss or increase the income per common share
from continuing operations.
The Company has initially applied SFAS No. 128 for the year ended June 30, 1998
and as required by SFAS No. 128, has restated all per share information for the
prior year to conform with the June 30, 1998 presentation.
For the periods presented, there were no items which changed the income (loss)
from continuing and discontinued operations as presented in the consolidated
statements of operations and the amounts used to compute basic and diluted
earnings (loss) per share. The following is information about the computation
of weighted-average shares utilized in the computation of basic and diluted
earnings (loss) per share. For the year ended June 30, 1997, common stock
equivalents have been excluded from the computation of the net loss per share
because inclusion of such equivalents is antidilutive.
F-8
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C> <C>
Weighted average number of basic shares 18,102,916 16,299,093
outstanding
Effect on dilutive securities:
Warrants 2,391,611 -
Options 474,036 -
-------------------------------
Weighted average number of fully diluted
shares outstanding 20,968,563 16,299,093
===============================
NOTE 2. INVENTORIES
Inventories at June 30, 1998 and 1997, are summarized as follows:
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Raw materials and supplies $ 455,000 $ 398,000
Work-in-process 1,783,000 1,478,000
Finished goods 836,000 478,000
Allowance for slow-moving and obsolete inventory (738,000) (690,000)
-----------------------------------
$ 2,336,000 $ 1,664,000
===================================
NOTE 3. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements at June 30, 1998 and 1997, is summarized as follows:
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Tooling and equipment $ 4,390,000 $ 3,971,000
Leasehold improvements 203,000 138,000
----------------------------------
4,593,000 4,109,000
Less accumulated depreciation and amortization 1,876,000 1,344,000
----------------------------------
$ 2,717,000 $ 2,765,000
==================================
</TABLE>
F-9
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
NOTE 4. NOTES PAYABLE
Notes payable consist of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Revolving loan payable to a bank pursuant to
August 9, 1996 credit facility, due on demand,
interest payable monthly at the prime rate plus
2% (10.5% at June 30, 1997). $ - $ 1,353,000
Term note payable to a bank pursuant to
August 9, 1996 credit facility, due in monthly
installments of $19,000, plus interest at the prime
rate plus 2.25% (10.75% at June 30, 1997), also
due on demand - 475,000
Unsecured notes payable to a company affiliated with
a stockholder, interest payable at 6%, due on demand. - 364,000
Unsecured note payable to officer/stockholder, interest
payable at 12%, due on demand. - 60,000
Unsecured notes payable to a company affiliated with
a stockholder, interest at prime plus 4%, payable on
demand. - 3,000
Revolving loan payable pursuant to June 30, 1998 credit
facility interest payable monthly at the prime rate plus
.75% (9.25% at June 30, 1998), due June 30, 2001. 180,000 -
Term note payable to a bank pursuant to June 30, 1998
credit facility, due in monthly installments of $8,333,
plus interest at a fixed rate plus 325 basis points
(8.75% at June 30, 1998), due June 30, 2003. 500,000 -
------------------------------------
680,000 2,255,000
Less current maturities 100,000 2,255,000
------------------------------------
$ 580,000 $ -
====================================
</TABLE>
F-10
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
Future maturities of Notes Payable at June 30, 1998 are as follows:
1999 $ 100,000
2000 100,000
2001 280,000
2002 100,000
2003 100,000
------------------
$ 680,000
==================
On June 30, 1998, the Company entered into a new credit facility with a
different lender, at which time, all amounts under the prior bank credit
facility were repaid.
The credit facility entered into on June 30, 1998 includes a revolving loan, a
line of credit and a $500,000 term loan. The revolving loan provides for
borrowings up to the lesser of $3,000,000 or the sum of a) 80% of eligible
accounts receivable and b) the lesser of $750,000 or 35% of eligible inventory;
and for the payment of a commitment fee equal to .25% per annum of the daily
unused portion of the revolving loan. The line of credit provides for equipment
financing up to the lesser of $750,000 or 75% of the purchase price for eligible
equipment each year through June 30, 2001. The Company has the option of
converting amounts borrowed under the line of credit to term loans on July 1,
1999, 2000 and 2001. At June 30, 1998, no amounts were outstanding under the
line of credit. This credit facility is secured by substantially all the assets
of the Company.
Interest on the revolving loan and line of credit loan is variable based on
either LIBOR or the Prime Rate as published in the Wall Street Journal, as
elected by the Company. Interest on the term loan and converted equipment loans
is either fixed, at a rate based on the U.S. Treasury yield, or variable based
on the Prime Rate, as elected by the Company. The Company has the ability to
convert between the different rates from time to time subject to certain
conditions.
In addition, the credit facility contains various restrictive covenants
including, among others, limitations on additional debt, payment of dividends,
management and ownership changes and compliance with specified financial ratios.
In connection with debt refinancing during the year ended June 30, 1997, the
Company recognized a gain on debt forgiveness of $140,000, which is reflected as
an extraordinary item within discontinued operations in the consolidated
statements of operations.
F-11
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
NOTE 5. CAPITAL STOCK
Common stock
- ------------
On June 30, 1998 and 1997, the Company had 30,000,000 authorized shares of
common stock, par value $0.01 per share, of which there are 19,949,169 and
17,005,474 shares were issued and outstanding at June 30, 1998 and 1997,
respectively.
On January 31, 1997, the Company filed a Registration Statement on Form S-2
covering the offer and sale by certain of the Company's stockholders of up to
3,550,650 shares of the Company's common stock. The Company received no
proceeds from this offering, and $50,000 of direct costs relating to the
offering were charged to additional paid-in capital.
During the year ended June 30, 1997, the Company began a private placement of
its common stock for an aggregate offering of $570,000, or 380,000 shares, at a
price of $1.50 per share. During the year ended June 30, 1997, $420,000 was
raised through the sale of 280,000 shares of such stock, and during the year
ended June 30, 1998, $150,000 was raised through the sale of the remaining
100,000 shares of such stock.
Also during the years ended June 30, 1998 and 1997, 33,000 and 40,000 shares of
common stock at an aggregate price of $70,000 and $65,000, respectively, were
issued to Company directors as compensation, and 31,000 and 8,100 shares at an
aggregate price of $130,000 and $12,000, respectively, were issued as
compensation to an outside consultant and employees. In addition, during the
years ended June 30, 1998 and 1997, 2,780,000 and 60,000 shares of common stock
were issued at an aggregate price of $1,135,000 and $1,000, respectively,
through the exercise of options and warrants. Of the 2,780,000 shares issued
upon exercise of options and warrants, approximately 1,663,000 shares were
issued on a net exercisable basis, for which no proceeds were received.
Common stock reserved for issuance at June 30, 1998, is as follows:
Number of
Shares
-------------
For exercise of outstanding warrants 1,470,602
For exercise of stock options 3,083,000
-------------
4,553,602
=============
Various agreements with a certain investor provide that upon the occurrence of
specified events, primarily should the Company cease to maintain its principal
offices within the State of Connecticut or fail to maintain a registration
statement covering the resale of its securities, the investor would have the
right to put all securities of the Company held by the investor at that time for
a
F-12
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
price equal to the greater of the then current market price per share of such
securities or $2 per share, less, if warrants are being held by such investor at
such time, the aggregate amount of the unpaid exercise prices of all such
warrants. Using $4.50 per share, which is the approximate market price at June
30, 1998, as the put price per share, the aggregate put price that would have to
be paid by the Company if the put were exercised would be approximately
$8,450,000. This put option expires on the date the investor ceases to hold at
least 35% of the common stock underlying the convertible securities originally
issued to it. If the investor were to have the right to put its securities and
were to choose to exercise that right, such an event would have a serious
adverse effect on the Company's liquidity and the Company would most likely have
to seek equity financing to be able to meet its obligations to the investor.
However, the Company has the ability to insure that its operations do not move
from Connecticut and intends to cause its current registration statement to be
maintained in a manner that would prevent the put from being operative.
Incentive Plans
- ---------------
In 1994, the Company adopted the Memry Corporation Stock Option Plan (the "1994
Plan"). Pursuant to this plan, incentive stock options were granted at prices
equal to or greater than the fair market value of the Company's common stock at
the date of grant, and were exercisable at the date of grant unless otherwise
stated. In addition, non-qualified options were granted at prices determined by
the Company's compensation committee, which may have been less than the fair
market value of the Company's common stock at date of grant, in which case an
expense equal to the difference between the option price and fair market value
was recognized. The exercise period for both the incentive and non-qualified
stock options generally could not exceed ten years. The Plan also allowed the
granting of Stock Appreciation Rights, however, only a minimal amount of such
rights were granted.
During the year ended June 30, 1998, the Company adopted the Memry Corporation
Long-term Incentive Plan (the "1997 Plan"), which superseded the 1994 Plan.
Under the 1997 Plan, incentive and non-qualified options may be granted to
employees and non-employee directors under terms similar to the 1994 Plan.
Also, under the 1997 Plan, Stock Appreciation Rights ("SARs"), Limited Stock
Appreciation Rights ("Limited SARs"), restricted stock, and performance shares
may be granted to employees. With respect to SARs, upon exercise, the Company
must pay to the employee the difference between the current market value of the
Company's common stock and the exercise price of the SARs. The SARs terms are
determined at the time of each individual grant, however if SARs are granted
which are related to an incentive stock option, then the SARs will contain
similar terms to the related option. Limited SARs may be granted in relation to
any option or SARs granted. Upon exercise, the Company must pay to the employee
the difference between the current market value of the Company's common stock
and the exercise price of the related options or SARs. Upon the exercise of
SARs or Limited SARs, any related option or SARs outstanding will no longer be
exercisable.
F-13
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
Restricted shares of common stock may also be granted to employees for no
consideration. The terms of the restriction are determined at the time of each
individual grant. Generally, if employment is terminated during the restricted
period, the participant must forfeit any stock still subject to restriction.
Performance shares are granted to employees based on individual performance
goals, and may be paid in shares or cash determined based on the shares earned
and the market value of the Company's common stock at the end of certain defined
periods.
Also, under the 1997 Plan, each quarter, all non-employee directors are granted
shares of the Company's common stock with a value equal to $2,500, determined
based on the market value of the Company's stock at the end of each quarter.
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), on July 1, 1996.
SFAS No. 123 established new standards for stock-based compensation plans under
which employees receive shares of stock or other equity instruments, such as
stock options or warrants, of the employer. This Statement established a fair
value based method of expense recognition for stock-based compensation plans and
encouraged, but did not require, entities to adopt that method in place of
existing generally accepted accounting principles. As permitted by SFAS No.
123, for options granted where the exercise price at date of grant is equal to
or exceeds the fair market value of the Company's stock, the Company has elected
to continue under existing generally accepted accounting principles and to
account for the options granted under APB Opinion No. 25, and accordingly, no
compensation cost has been recognized in the consolidated statements of
operations for grants under the option plan. Had compensation cost for the
stock option plans been recognized based on the grant date fair values of
awards, the method described in SFAS No. 123, the reported net income (loss)
would have been increased/decreased to the pro forma amounts shown below:
1998 1997
--------------------------------
Net income (loss):
As reported $ 2,925,000 $ (1,011,000)
================================
Pro forma $ 2,678,000 $ (1,355,000)
================================
Basic earnings per share:
As reported $ 0.16 $ (0.06)
================================
Pro forma $ 0.15 $ (0.08)
================================
Diluted earnings per share:
As reported $ 0.14 $ (0.06)
================================
Pro forma $ 0.13 $ (0.08)
=================================
F-14
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
The fair value of each grant, used to determine the proforma information above,
is estimated at the grant date using the fair value option-pricing model with
the following weighted average assumptions for grants awarded during the years
ended June 30, 1998 and 1997:
1998 1997
-------------------------
Dividend rate - -
Risk free interest rate 5.82% 6.19%
Weighted average expected lives, in years 3.80 5.75
Price volatility 31.8% 30.0%
A summary of the status of the Company's stock option plans at June 30, 1998 and
1997, and changes during the years then ended, is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Options Exercise
Reserved Outstanding Price
---------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1996 600,000 492,500 $ 1.35
Canceled (62,500) $ 1.51
Granted 467,000 $ 1.75
Exercised - -
------------------------------------------------
Balance, June 30, 1997 1,100,000 897,000 $ 1.54
Canceled (35,500) $ 1.67
Granted 720,000 $ 3.88
Exercised (44,000) $ 1.59
------------------------------------------------
BALANCE, JUNE 30, 1998 3,083,000 1,537,500 $ 2.63
================================================
</TABLE>
At June 30, 1998 and 1997, 394,000 and 246,500 (weighted average exercise price
of $1.45) of the outstanding options were exercisable, respectively. The
weighted-average grant date fair value per option of options granted during the
years ended June 30, 1998 and 1997 were $1.29 and $ .74, respectively. For the
years ended June 30, 1998 and 1997, all options granted carried an exercise
price equal to the fair value of the Company's stock at the date of grant.
A further summary of options outstanding at June 30, 1998, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (In Years) Price Exercisable Price
- -------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$0.90 to $4.25 1,537,500 8.79 $2.63 394,000 $1.51
</TABLE>
F-15
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
Warrants
- --------
The Company has also issued stock warrants to employees and others. The
compensation cost charged to operations for warrants granted to employees was
$34,000 and $152,000 during the years ended June 30, 1998 and 1997,
respectively.
The following table summarizes warrants outstanding at June 30, 1998 and 1997,
and the changes in warrants during the years then ended:
<TABLE>
<CAPTION>
Weighted-
Average
Shares Warrants Exercise
Reserved Outstanding Price
--------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1996 5,709,368 5,589,368 $ 1.77
Canceled (363,636) $ 7.39
Granted 156,000 $ 0.40
Exercised (60,000) $ 0.01
--------------------------------------------------
Balance, June 30, 1997 5,321,732 5,321,732 $ 1.37
Canceled (414,525) $ 5.00
Granted - -
Exercised (3,436,605) $ 1.02
--------------------------------------------------
BALANCE, JUNE 30, 1998 1,470,602 1,470,602 $ 1.13
==================================================
</TABLE>
Of the 3,436,605 warrants exercised during the year ended June 30, 1998,
approximately 2,370,000 were converted, on a net exercise basis, to
approximately 1,663,000 shares of common stock.
A further summary of warrants outstanding at June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
================================================== ===============================
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (In Years) Price Exercisable Price
- -------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$ .01 to $2.00 1,470,602 1.69 $1.13 1,440,602 $1.15
</TABLE>
F-16
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
NOTE 6. MAJOR CUSTOMERS
Product sales revenue for the years ended June 30, 1998 and 1997, include sales
to two major customers, each of which accounted for greater than 10% of the
total sales of the Company. A summary of sales to these customers during the
years ended June 30, 1998 and 1997, and accounts receivable from these customers
at June 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- --------------------------------------
Accounts Accounts
Customer Sales Receivable Sales Receivable
---------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Company A $ 8,309,000 $ 1,846,000 $ 5,491,000 $ 948,000
Company B 7,332,000 830,000 3,429,000 878,000
----------------- ----------------- ----------------- -----------------
$ 15,641,000 $ 2,676,000 $ 8,920,000 $ 1,826,000
================= ================= ================= =================
</TABLE>
Sales to Company A are made under a private label/distribution agreement wherein
Company A became the exclusive distributor of certain products for an initial
term of five years, which expires in 2001.
NOTE 7. MAJOR SUPPLIERS
The Company currently purchases a significant portion of raw materials from two
suppliers. However, management believes that several other suppliers could
provide similar materials on comparable terms without significantly impacting
shipping or sales.
NOTE 8. LEASES
The Company leases its Connecticut and California warehouse and office
facilities under operating leases. The lease on the Connecticut facility
expires in February 2001 and the lease on the California facility expires in
September 2001. The Company also leases certain equipment under noncancelable
leases which have been recorded as capital leases and included in the
accompanying consolidated balance sheets under the caption "Equipment and
Improvements".
F-17
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
Future minimum lease payments under capital leases and significant noncancelable
operating leases, with remaining terms of one year or more, are as follows at
June 30, 1998:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------------- -----------------
<S> <C> <C>
1999 $ 35,000 $ 719,000
2000 18,000 737,000
2001 2,000 731,000
2002 137,000
---------------- -----------------
55,000 $ 2,324,000
=================
Less amount representing interest 5,000
----------------
Present value of future minimum lease payments 50,000
Less current maturities 31,000
----------------
$ 19,000
================
</TABLE>
Rent expense under operating leases for the years ended June 30, 1998 and 1997
approximated $416,000 and $392,000, respectively.
NOTE 9. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. For financial reporting purposes,
a valuation allowance of $9.4 and $10.5 million has been recognized at June 30,
1998 and 1997, respectively, to reflect the estimated amount of operating loss
carryforwards and temporary differences which may not be realized, caused by the
lack of sustained profitability of the Company. The approximate effect of
carryforwards and temporary differences that give rise to deferred tax assets
and liabilities at June 30, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ - $ 13,000
Inventory reserves 298,000 278,000
Capitalization of inventory costs - 29,000
Reserve for losses on assets of discontinued
operations 233,000 233,000
Vacation accruals 49,000 41,000
Research and development credit carryforwards 160,000 160,000
Other 36,000 85,000
Net operating loss carryforwards 8,600,000 9,620,000
--------------------------------------
TOTAL DEFERRED TAX ASSETS 9,376,000 10,459,000
Valuation allowance (9,376,000) (10,459,000)
---------------------------------------
NET DEFERRED TAX ASSETS $ - $ -
======================================
</TABLE>
The 1998 provision for income taxes is comprised solely of currently payable
state taxes.
F-18
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
A reconciliation of the anticipated income tax expense (computed by applying the
Federal statutory income tax rate of 34% to the income (loss) from continuing
operations before taxes) to the provision for income taxes as reported in the
consolidated statements of operations is as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------- ----------------------------
<S> <C> <C>
Provision (benefit) for income taxes at
statutory Federal rate $ 1,100,000 34 % $ (88,000) (34)%
Increase (decrease) resulting from:
State corporation income tax, net of
federal tax benefit 143,000 5 % (17,000) (6)%
(Decrease) increase in valuation
allowance for deferred taxes (1,083,000) (34)% 105,000 40 %
-------------------------- ------------------------
PROVISION FOR INCOME TAXES $ 160,000 5 % $ - -
========================== ========================
</TABLE>
At June 30, 1998, the Company has Federal and state net operating loss
carryforwards for income tax purposes, which expire as follows:
Federal State
------------------------- ------------------------------
Year Amount Year Amount
------------------------- ------------------------------
2003 $ 1,724,000 1998 $ 1,906,000
2004 1,841,000 1999 2,311,000
2005 1,859,000 2000 2,119,000
2006 2,841,000 2001 1,732,000
2007 4,669,000 ------------
2008 3,237,000 $ 8,068,000
2009 1,957,000 ============
2010 3,120,000
2011 2,497,000
------------
$ 23,745,000
============
In addition, the Company has tax credit carryforwards available to offset future
taxable income aggregating approximately $160,000 which expire in various
amounts from 1999 through 2008.
F-19
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
NOTE 10. COMMITMENTS AND CONTINGENCIES
401(K) Plan
- -----------
During the years ended June 30, 1998 and 1997, Company contributions to its
401(k) profit sharing and savings plan approximated $56,000 and $36,000,
respectively.
Litigation
- ----------
There are various lawsuits and claims, arising in the ordinary course of
business, pending against the Company. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse effect on
the results of operations or the financial position of the Company.
NOTE 11. DISCONTINUED OPERATIONS
In April 1997, the Company decided to discontinue the operations of Wright, and
on June 5, 1997, the Company ceased the operations of Wright. At June 30, 1998,
the Company had sold substantially all of the machinery, equipment and inventory
of Wright, and expects to complete the disposal of Wright through the
liquidation of its remaining assets within one year. The net loss from
discontinued operations incurred during the year ended June 30, 1998 of $151,000
included losses from the sales and writedown of assets in excess of amounts
estimated at June 30, 1997.
Sales of Wright were $1,988,000 for the year ended June 30, 1997. There were no
sales during the year ended June 30, 1998.
F-20
<PAGE>
MEMRY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
At June 30, 1998 and 1997, the assets and liabilities of Wright consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
Assets
<S> <C> <C>
Accounts receivable $ - $ 236,000
Inventories 539,000
Property and equipment 879,000 879,000
Less adjustment for write-down to estimated
realizable value (579,000) (579,000)
Other assets - 72,000
----------------------------------
300,000 1,147,000
Liabilities
Estimated losses from disposal of segment 90,000 211,000
----------------------------------
Net assets of Wright $ 210,000 $ 936,000
==================================
</TABLE>
The foregoing net assets have been classified as current at June 30, 1998, since
the disposal of the assets is expected to be completed within one year.
Discontinued operations include management's best estimate of the amounts
expected to be realized on the disposal of its remaining assets. The amounts
the Company will ultimately realize could differ in the near term from the
amounts assumed in arriving at the loss on disposal of the discontinued
operations, however the Company does not expect such differences to be
significant.
In conjunction with the sale of Wright inventory, the Company received a note
receivable of $325,000 and a warrant to purchase up to 15% of the buyer's fully-
diluted equity for $315,000. The warrant is currently exercisable and expires
on June 30, 2003.
NOTE 12. EMERGING ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), becomes effective for the Company's year ending June
30, 1999. Comprehensive income, as defined by SFAS No. 130, is the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of financial statements with the same prominence as the Company's
other financial statements. However, comprehensive income is not required to be
reported by a Company that does not have any items of comprehensive income other
than net income. The Company does not expect that comprehensive income will be
required to be reported because it anticipates that net income will be the only
item of comprehensive income.
F-21
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item is incorporated herein by reference to the
sections entitled "Proposal No. 1-Election of Directors," "-Executive Officers
of the Company" and "-Section 16(a) Beneficial Ownership Reporting Compliance"
of the Company's Definitive Proxy Statement to be filed with the Commission
within 120 days after June 30, 1998.
Item 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
sections entitled "Proposal No. 1-Election of Directors -Compensation of
Directors" and "-Executive Compensation" of the Company's Definitive Proxy
Statement to be filed with the Commission within 120 days after June 30, 1998.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Company's Definitive Proxy Statement to be filed with the
Commission within 120 days after June 30, 1998.
18
<PAGE>
Item 12. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
section entitled "Proposal No. 1-Election of Directors-Certain Relationships and
Transactions" of the Company's Definitive Proxy Statement to be filed with the
Commission within 120 days after June 30, 1998.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits listed in the Index to Exhibits following the Signature
Page herein are filed as part of this Annual Report on Form 10-KSB.
(b) Reports on Form 8-K
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
MEMRY CORPORATION
Date: September 25, 1998 By: /s/ James G. Binch
------------------------
James G. Binch
President, CEO and
Chairman of the Board
By: /s/ Thomas D. Carey
------------------------
Thomas D. Carey
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ James G. Binch President, CEO September 25, 1998
_____________________ and Chairman of the Board
James G. Binch (Principal Executive Officer
and Principal Financial
Officer)
_____________________ Director September 25, 1998
Nicholas J. Grant
/s/ Jack Halperin
_____________________ Director September 25, 1998
Jack Halperin
/s/ W. Andrew Krusen, Jr.
_____________________ Director September 25, 1998
W. Andrew Krusen, Jr.
/s/ John A. Morgan
_____________________ Director September 25, 1998
John A. Morgan
20
<PAGE>
Exhibit Index
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Certificate of Incorporation of the Company, as amended (11)
3.2 By-Laws of the Company, as amended (8)
3.3 Amendment Number 1 to By-Laws of the Company, as amended (13)
10.1 Lease Agreement, dated January 24, 1991, (1)
between the Company and Brookfield Commerce,
relating to 57 Commerce Drive, Brookfield, CT
10.2 Warrant Issued to Connecticut Innovations, (2)
Inc. ("CII") as of March 1, 1992
10.3 Employment Agreement, dated September 24, (3)
1993, between the Company and James G. Binch
10.4 SBIR Contract dated December 9, 1993 between (4)
the Company and NASA
10.5 Employee Non-Disclosure Agreement, dated as of (4)
October 18, 1994, between the Company and
James G. Binch
10.6 Convertible Subordinated Debenture Purchase Agreement, (8)
dated as of December 22, 1994, between the Company and
CII
10.7 First Amendment to Convertible Subordinated Debenture (5)
Purchase Agreement, dated October 11, 1995, between
the Company and CII
10.8 First Addendum to Convertible Subordinated Debenture, (5)
dated October 11, 1995, made by the Company and agreed
to by CII
10.9 First Addendum to Stock Subscription Warrant (re: (5)
Warrant No. 94-4), dated October 11, 1995, made by the
Company and agreed to by CII
21
<PAGE>
Exhibit Index
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.10 First Addendum to Stock Subscription Warrant (re: (5)
Warrant No. 94-5), dated October 11, 1995, made by the
Company and agreed to by CII
10.11 First Addendum to Stock Subscription Warrant (re: (5)
Warrant No. 94-6), dated October 11, 1995, made by the
Company and agreed to by CII
10.12 Employment Agreement, dated as of November 7, 1995, (6)
between the Company and William H. Morton, Jr.
10.13 Second Amendment to Convertible Subordinated Debenture (8)
Purchase Agreement, dated as of June 28, 1996, between
the Company and CII
10.14 Amended and Restated Class I Warrant Certificate (8)
(Warrant Certificate No. 94-4A) issued by the
Company to CII
10.15 Amended and Restated Class II Warrant Certificate (8)
(Warrant Certificate No. 94-5A) issued by the
Company to CII
10.16 Second Addendum to Class III Warrants issued by the (8)
Company to CII
10.17 Sublease, dated as of June 28, 1996, between the Company (7)
and Raychem Corporation
10.18 Warrant Certificate exercisable for 1,130,000 shares of (7)
Common Stock, dated June 28, 1996, issued by the Company
to Raychem Corporation
10.19 Warrant Certificate exercisable for 1,250,000 shares of (7)
Common Stock, dated June 28, 1996, issued by the Company
to Raychem Corporation
10.20 Amendment to Lease Agreement between the Company and (8)
Brookfield Commerce relating to 57 Commerce Drive,
22
<PAGE>
Exhibit Index
Exhibit
Number Description of Exhibit
- ------ ----------------------
Brookfield, CT.
10.21 Warrant Cert. No. 96-4, dated as of July 16, 1996, (8)
issued to Dominion Capital Partners
10.22 Warrant Cert. No. 96-5, dated as of July 15, 1996, (8)
issued to Dawn M. Morton
10.23 Commercial Revolving Loan, Term Loan and Security (8)
Agreement, dated August 9, 1996, among the Company,
Wright Machine Corporation and Affiliated Business
Credit Corporation
10.24 Mortgage and Security Agreement dated as of August 9, 1996, (8)
from Wright Machine Corporation and Affiliated Business
Credit Corporation
10.25 Letter Agreement, dated June 26, 1996, between the (8)
Company and James Proft
10.26 Employee Agreement on Inventions and Patents, between (8)
the Company and James G. Binch
10.27 Memry Corporation Stock Option Plan, as amended (9)
10.28 Form of Nontransferable Incentive Stock Option Agreement under (9)
the 1994 Plan
10.29 Form of Nontransferable Non-Qualified Stock Option (9)
Agreement under the 1994 Plan
10.30 Warrant Certificate No. 96-7(A), dated as of January ___, (11)
1997, issued to James Proft
10.31 Purchase Agreement, dated as of May 12, 1997, between (10)
Wright and Thomas Industries Auction & Liquidation
Corporation
10.32 Amended and Restated Tinel-Lock Supply Agreement, (11)
23
<PAGE>
Exhibit Index
Exhibit
Number Description of Exhibit
- ------ ----------------------
dated as of February 19, 1997, and effective as of
December 20, 1996, between the Company and Raychem
Corporation
10.33 Amended and Restated Private Label/Distribution (11)
Agreement, dated as of February 19, 1997, and effective
as of December 20, 1996, between the Company and
Raychem Corporation*
10.34 Amendment No. 3 to Amended and Restated Purchase Agreement (11)
and Amendment No. 1 to Transitional Services Agreement
between the Company and Raychem Corporation, dated as
of February 19, 1997 and effective as of December 20, 1996
10.35 Agreement, dated as of June 5, 1997, between the Company (11)
and Wendy M. Gavaghan
10.36 Securities Purchase Agreement, dated as of June 26, 1997, (11)
between the Company and Dominion Financial Group
International LDC
10.37 Memry Corporation's 1997 Long Term Incentive Plan, as amended. (12)
10.38 Form of Nontransferable Incentive Stock Option Agreement (12)
under the 1997 Plan
10.39 Employment Agreement, dated as of the 29th day of October, (12)
1997, between Thomas D. Carey and the Company
10.40 Letter Agreement, dated December 23, 1997, between James G. (12)
Binch and the Company relating to the exchange of a
promissory note for the Company's Common Stock
10.41 Commercial Revolving Loan, Term Loan, Line of Credit and (13)
Security Agreement, dated June 30, 1998, between the
Company and Webster Bank
10.42 Revolving Loan Note, dated June 30, 1998, by the Company in (13)
favor of Webster Bank in principal amount of $3,000,000
24
<PAGE>
Exhibit Index
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.43 Term Loan Note, dated June 30, 1998, by the Company in favor of (13)
Webster Bank in principal amount of $500,000
10.44 Equipment Loan Note, dated June 30, 1998, by the Company in (13)
favor of Webster Bank in principal amount of $750,000
10.45 Amendment of Sublease, dated March 26, 1998, between Raychem (13)
Corporation and Memry Corporation
21.1 Information regarding Wright Machine Corporation (11)
27 Financial Data Schedule (13)
- -----------------------
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1991.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1991.
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1993.
(4) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1994.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1995.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended September 30, 1995.
(7) Incorporated by reference to the Company's Current Report on Form 8-K filed
July 15, 1996.
(8) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1996, as amended.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended December 31, 1996.
25
<PAGE>
Exhibit Index
Exhibit
Number Description of Exhibit
- ------ ----------------------
(10) Incorporated by reference to the Company's Current Report on Form 8-K filed
June 25, 1997.
(11) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal ended June 30, 1997, as amended.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended December 31, 1997.
(13) Filed herewith
* Subject to a confidential treatment request.
26
<PAGE>
EXHIBIT 3.3
AMENDMENT NUMBER 1
TO
BYLAWS OF
MEMRY CORPORATION
* * *
Pursuant to Article XI of the Bylaws of Memry Corporation, a Delaware
corporation (the "Corporation"), and in accordance with resolutions duly adopted
by the board of directors of the Corporation, the Bylaws of the Corporation (the
"Bylaws") are hereby amended as follows:
1. Amendment to Section 1.2. Section 1.2 of the Bylaws is hereby amended
------------------------
to read in its entirety as follows:
"Section 1.2 SPECIAL MEETINGS.
Special meetings of stockholders for any purpose or purposes may
be held at any time upon call of the Chief Executive Officer or a
majority of the Board of Directors, at such time and place either
within or without the State of Delaware as may be stated in the
notice."
2. Addition of Section 1.8. A new Section 1.8 of the Bylaws, which reads
-----------------------
in its entirety as follows, is hereby added.
"Section 1.8. ADVANCE NOTICE OF STOCKHOLDERS' PROPOSALS
At any annual or special meeting of stockholders, proposals by
stockholders shall be considered only if advance notice thereof has
been timely given as provided herein. Notice of any proposal to be
presented by any stockholder at any meeting of stockholders shall be
given to the Secretary of the Corporation not less than 60 nor more
than 90 days prior to the date of the meeting; provided, however, that
if the date of the meeting is first publicly announced or disclosed
less than 70 days prior to the date of the meeting,
<PAGE>
such notice shall be given not more than ten days after such date is
first so announced or disclosed. No additional public announcement or
disclosure of the date of any annual meeting of stockholders need be
made if the Corporation shall have previously disclosed, in these by-
laws or otherwise, that the annual meeting in each year is to be held
on a determinable date, unless and until the Board determines to hold
the meeting on a different date. Any stockholder who gives notice of
any such proposal shall deliver therewith the text of the proposal to
be presented and a brief written statement of the reasons why such
stockholder favors the proposal and setting forth such stockholder's
name and address, the class and number of all shares of each class of
stock of the corporation beneficially owned by such stockholder and
any material interest of such stockholder in the proposal (other than
as a stockholder). The Chairman of the meeting shall, if the facts
warrant, determine and declare whether such notice has not been duly
given and if he should so determine he shall so declare to the meeting
and direct that the proposal not be considered."
3. Addition of Section 1.9. A new Section 1.9 of the Bylaws, which reads
-----------------------
in its entirety as follows, is hereby added.
"Section 1.9. ADVANCE NOTICE OF STOCKHOLDER'S NOMINEES
Only persons who are nominated in accordance with the procedures
set forth in this Section 1.9 shall be eligible for election as
directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made at a meeting of stockholders
by or at the direction of the Board of Directors or by any stockholder
of the Corporation entitled to vote for the election of Directors at
the meeting who complies with the notice procedures set forth in this
Section 1.9. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely
notice in writing to the Secretary of the Corporation. To be timely,
a stockholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60
days nor more than 90 days prior to the meeting; provided, however,
that in the event that less than 70 days notice or prior public
disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so
received not later than the close a business on the tenth day
following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made. Such stockholder's notice
shall set forth (a)
-2-
<PAGE>
as to each person who the stockholder proposes to nominate for
election or reelection as a director, (i) the name, age, business
address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of
shares of the Corporation which are beneficially owned by such person,
and (iv) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended
(including without limitation such person's written consent to being
named in the proxy statement as a nominee and to serving as a director
if elected); and (b) as to the stockholder giving the notice (i) the
name and address, as they appear in the Corporation's books, of such
stockholder and (ii) the class and number of shares of the Corporation
which are beneficially owned by such stockholder. At the request of
the Board of Directors any person nominated by the Board of Directors
for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in the
stockholder's notice of nomination which pertains to the nominee. No
person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedure set forth in this
Section 1.9. The Chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting the nomination was not made in
accordance with procedures described by the By-Laws, and if he should
so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded."
4. Bylaws Remain in Force. Except as expressly set forth above, the
----------------------
Bylaws remain unmodified and in full force and effect.
* * *
-3-
<PAGE>
EXHIBIT 10.41
COMMERCIAL REVOLVING LOAN, TERM LOAN, LINE OF CREDIT
AND SECURITY AGREEMENT
This Commercial Revolving Loan, Term Loan, Line of Credit and Security
Agreement dated June 30, 1998 between MEMRY CORPORATION, a Delaware corporation
with its chief executive office and principal place of business at 57 Commerce
Drive, Brookfield, Connecticut 06804 ("Borrower") and WEBSTER BANK, a banking
institution with an office at 185 Asylum Street, City Place II, 5th Floor, HFD
605, Hartford, Connecticut 06103-3494 ("Lender").
--------------------
PREAMBLE
WHEREAS, Borrower has requested Lender to extend to Borrower the following
financial accommodations (collectively, the "Loans"): (a) a revolving loan in
the maximum aggregate principal amount of up to $3,000,000, (b) a term loan in
the original principal amount of $500,000, and (c) a line of credit which
provides for, among other things, amounts outstanding thereunder to be converted
to term indebtedness; and
WHEREAS, Lender has agreed to extend the Loans to Borrower on the conditions
set forth below.
NOW, THEREFORE, for the mutual considerations contained in this Agreement,
Borrower and Lender agree as follows:
ARTICLE I. Definitions
Section 1.1. Accounting Terms; Etc. Unless otherwise defined, all accounting
terms shall be construed, and all computations or classifications of assets and
liabilities and of income and expenses shall be made or determined in accordance
with generally accepted accounting principles consistently applied. As used
herein, or in the Financing Agreements or in any certificate, document or report
delivered pursuant to this Agreement or any other Financing Agreement, the
following terms shall have the following meanings:
(a) "Account" and "Accounts" shall have the meanings assigned in Section
12.1(a) hereof.
(b) "Account Debtor" and "Account Debtors" shall mean the person or entity or
persons or entities obligated to Borrower upon the Accounts.
<PAGE>
-2-
(c) "Additional Costs" shall have the meaning assigned in Section 8.1 hereof.
(d) "Agreement" shall mean this Commercial Revolving Loan, Term Loan, Line of
Credit and Security Agreement as the same may from time to time be amended,
supplemented or otherwise modified.
(e) "Arrangement" shall have the meaning assigned in Section 9.1(n) hereof.
(f) "Business Day" shall mean any day other than a day on which commercial
banks in Hartford, Connecticut are required or permitted by law to close.
(g) "Capital Leases" shall mean capital leases, conditional sales contracts
and other title retention agreements relating to the purchase or acquisition of
Capital Assets.
(h) "Capitalized Leases" shall mean Capital Leases which are required by GAAP
to be capitalized on the Borrower's balance sheet.
(i) "CII Agreement" shall have the meaning assigned in Section 10.1(i)
hereof;
(j) "Collateral" shall mean the property of Borrower described in Section
12.1 hereof.
(k) "Company" and "Companies" shall mean Borrower and any entities affiliated
with Borrower in connection with any Plan.
(l) "Converted Equipment Loan" shall mean an Initial Converted Equipment
Loan, a Subsequent Converted Equipment Loan or a Final Converted Equipment Loan,
and "Converted Equipment Loans" shall mean the Initial Converted Equipment Loan,
the Subsequent Converted Equipment Loan and the Final Converted Equipment Loan.
(m) "Converted Equipment Loan Notes" shall mean the Initial Converted
Equipment Loan Note, the Subsequent Converted Equipment Loan Note and the Final
Converted Equipment Loan Note.
(n) "Current Maturity of Long-Term Debt" shall mean the current maturity of
long term Indebtedness paid or payable during the applicable period, including
but not limited to, amounts required to be paid or payable during such period
under Capital Leases.
(o) "Debt to Worth Ratio" shall mean, during the applicable period, that
quotient equal to Total Liabilities, divided by Tangible Net Worth.
<PAGE>
-3-
(p) "Debt Service Coverage Ratio" shall mean, during the applicable period,
that quotient equal to (i) EBITDA, divided by (ii) the sum of (A) Interest, PLUS
Current Maturity of Long-Term Debt.
(q) "Defaulting Event" shall mean the occurrence of an Event of Default or
the occurrence of any condition or event which but for the giving of notice or
passage of time or both would constitute an Event of Default.
(r) "Discount Rate" shall mean the rate which, when compounded monthly, is
equivalent to the Treasury Rate when compounded semi-annually.
(s) "Dollar" and the sign "$" shall mean lawful money of the United States of
America.
(t) "EBIT" shall mean, for the applicable period, Borrower's earnings before
Interest and taxes, as determined in accordance with GAAP.
(u) "EBITDA" shall mean, for the applicable period, Borrower's earnings
before Interest, taxes, depreciation and amortization for such period, all as
determined in accordance with GAAP.
(v) "EBIT to Interest Ratio" shall mean, during the applicable period, that
quotient equal to EBIT, divided by Interest.
"Election Notice" shall have the meanings assigned in Sections 3.2, 4.4, 5.4
and 6.4 hereof.
(w) "Eligible Accounts" shall mean those Accounts of Borrower which arise
from the sale of inventory or rendition of services in the ordinary course of
Borrower's business, are subject to Lender's perfected, first lien security
interest and no other lien or security interest, and are evidenced by an invoice
or other documentary evidence satisfactory to Lender. Further, no Account shall
be an Eligible Account if:
(i) it arises out of a sale made by Borrower to any affiliate, division,
subsidiary or parent of Borrower or to any person or entity controlled by or
under common control with an affiliate, division, subsidiary or parent of
Borrower;
(ii) it is due or unpaid more than seventy (70) days after its original
invoice date;
(iii) the account debtor is also Borrower's creditor or supplier, has
disputed liability or made any claim with respect to any other account due
from such account debtor to Borrower, or the account is otherwise subject to
any defense, counterclaim or offset of or by the
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account debtor (provided, however, that Accounts of Borrower arising out of
sales to Raychem Corporation shall not be ineligible pursuant to this
subsection (iii) if Lender has received a landlord's" agreement acceptable in
form, scope and substance to Lender in Lender's sole discretion);
(iv) the account debtor is located outside the United States (unless such
account is supported by a letter of credit or credit insurance acceptable in
form, scope and substance to Lender in Lender's sole discretion);
(v) the account debtor is located in New Jersey or Minnesota, unless
Borrower has (x) filed a Notice of Business Activities Report in the
appropriate office or agency for such state in the then current year, or (y)
received a Certificate of Authority to do business and is in good standing in
such state;
(vi) the sale giving rise to the account is on a bill-and-hold, guaranteed
sale, sale-and-return, sale on approval, consignment or other repurchase or
return basis, or is evidenced by a Note or chattel paper;
(vii) Borrower has made an agreement with the account debtor for any
deduction from the invoice representing said account except for discounts or
allowances made in the ordinary course of Borrower's business for prompt
payment, which discounts or allowances are reflected in the calculation of
the face value of each respective invoice related thereto;
(viii) fifty percent (50%) or more of the aggregate invoices for an
account debtor are due or unpaid for more than seventy (70) days after their
original invoice date;
(ix) it arises out of a sale made by the Borrower to an account debtor
that is the United States Government or any agency or subdivision thereof
(collectively the "Government"), unless Borrower has complied in all respects
with the Federal Assignment of Claims Act of 1940, or has otherwise satisfied
Lender as to the assignability and collectability of said accounts, provided,
however, that up to $50,000 of Accounts outstanding at any one time and
arising out of sales by the Borrower to the Government shall not be rendered
ineligible solely because the Borrower has not complied as aforesaid; or
(x) the Lender in its sole but reasonable discretion deems the Account to
be unacceptable for any reason.
If there is any dispute as to whether any Account is an Eligible Account,
the determination of Lender shall at all times control.
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(x) "Eligible Equipment" shall mean new equipment to be purchased by the
Borrower for its business.
(y) "Eligible Inventory" shall mean Borrower's inventory of raw materials,
work-in-process and finished goods (excluding so called "Ultravalve"
inventory and until the new perpetual inventory control system known as "MFG
Pro" is installed by Borrower and is operational, excluding inventory
characterized as inventory of "Memry East" or "Connecticut Tools") located at
57 Commerce Drive, Brookfield, Connecticut and 4065 Campbell Avenue, San
Mateo County, Menlo Park, California to the extent Lender, in its sole but
reasonable discretion, determines that such inventory is eligible for
advance. In addition and without limiting Lender's discretion, Eligible
Inventory shall be net of reserves and returns, valued at the lower of cost
or market (as determined in accordance with the FIFO method of accounting),
and subject to Lender's perfected first security interest and to no other
lien or security interest. Further and without limiting Lender's discretion,
no inventory shall be eligible if it is:
(i) deemed by Lender as slow moving or obsolete;
(ii) not otherwise in good condition and salable through normal trade
channels;
(iii) not salable in the ordinary course of Borrower's business; or
(iv) at a location for which Lender has not received a lessor's agreement
in form and content satisfactory to Lender in its sole discretion.
(z) "Environmental Laws" shall mean any and all applicable foreign,
federal, state and local statutes, laws, regulations, rules, ordinances,
orders, guidances, policies or common law (whether now existing or hereafter
enacted or promulgated) pertaining to the environment, of any and all
federal, state or local governments and governmental and quasi-governmental
agencies, bureaus, subdivisions, commissions or departments which may now or
hereafter have jurisdiction over Borrower and all applicable judicial and
administrative and regulatory decrees, judgments and orders, including common
law rulings and determinations, relating to injury to, or the protection of,
real or personal property or human health or the environment, including,
without limitation, all requirements pertaining to reporting, licensing,
permitting, investigation, remediation and removal of emissions, discharges,
releases or threatened releases of Hazardous Materials, chemical substances,
pollutants or contaminants whether solid, liquid or gaseous in nature, into
the environment or relating to the manufacture, processing, distribution use,
treatment, storage, disposal, transport or handling of such Hazardous
Materials, chemical substances, pollutants or contaminants.
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Without limiting the generality of the foregoing, the term "Environmental
Laws" shall encompass each of the following statutes, and regulations
promulgated thereunder, and amendments and successors to such statutes and
regulations, as may be enacted and promulgated from time to time: Federal
Occupational Safety and Health Act ("OSHA"); the Clean Air Act ("CAA"); the
Toxic Substances Control Act ("TSCA"); the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("SARA"); the Clean Water Act
("CWA"); the Resource Conservation and Recovery Act, as amended by the Hazardous
and Solid Waste Amendments of 1984 ("RCRA"); the Hazardous Materials
Transportation Act; and all applicable Environmental Laws of each state and
municipality in which Borrower conducts business or locates assets and all rules
and regulations thereunder and amendments thereto, and all similar state and
local laws, rules and regulations.
(aa) "Equipment Loan" shall mean an Initial Equipment Loan, a Subsequent
Equipment Loan or a Final Equipment Loan and "Equipment Loans" shall mean the
Initial Equipment Loans, the Subsequent Equipment Loans and the Final Equipment
Loans.
(bb) "Equipment Loan Conversion Dates" shall mean the Initial Equipment Loan
Conversion Date, the Subsequent Equipment Loan Conversion Date and the Final
Equipment Loan Conversion Date.
(cc) "Equipment Loan Account" shall have the meaning assigned in Section 4.2
hereof.
(dd) "Equipment Loan Borrowing Base" shall mean an amount equal to the lesser
of: (i) Seven Hundred Fifty Thousand Dollars ($750,000); or (ii) seventy-five
percent (75%) of the face amount of net invoices for Eligible Equipment.
(ee) "Equipment Loan Note" shall have the meaning assigned in Section 4.2
hereof.
(ff) "ERISA" shall mean the Employee Retirement Income Security Act of 1974
and all rules and regulations promulgated pursuant thereto, as the same may from
time to time be supplemented or amended.
(gg) "Event of Default" and "Events of Default" shall have the meanings
assigned in Section 13.1 hereof.
(hh) "Final Converted Equipment Loan" shall have the meaning assigned in
Section 6.7 hereof.
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(ii) "Final Converted Equipment Loan Maturity Date" shall mean June 30, 2004.
(jj) "Final Converted Equipment Loan Note" shall have the meaning assigned in
Section 6.7 hereof.
(kk) "Final Equipment Loan" and "Final Equipment Loans" shall have the
meanings assigned in Section 6.1 hereof.
(ll) "Final Equipment Loan Conversion Date" shall mean July 1, 2001.
(mm) "Final Equipment Loan Maturity Date" shall mean June 30, 2001.
(nn) "Financing Agreement" or "Financing Agreements" shall mean this
Agreement, the Notes, the Patent Security Agreement, the Trademark Security
Agreement and any and all other instruments, agreements and documents executed
in connection herewith or therewith or related hereto or thereto, together with
any amendments, supplements or modifications hereto or thereto.
(oo) "Fixed Assets" shall mean equipment and other assets of Borrower which,
by generally accepted accounting principles, must be treated as fixed assets in
financial statements of Borrower.
(pp) "Fixed Rate" shall mean the rate of interest determined by the Lender to
be the sum of the imputed United States Treasury Notes annual yield as of the
first day of the applicable Interest Period based upon quotes reported in the
Federal Reserve Statistical Release H.15 - Selected Interest Rates under the
heading "U.S. Government Securities/Treasury constant maturities" for United
States Treasury Notes having a maturity approximately equal to such Interest
Period. In the event Release H.15 is no longer published, Lender shall select a
comparable publication to determine the Fixed Rate.
(qq) "Fixed Rate Loan" shall mean the Initial Converted Equipment Loan, the
Subsequent Converted Equipment Loan, the Final Converted Equipment Loan or the
Term Loan in the event the Borrower elects an interest rate applicable thereto
based upon the Fixed Rate.
(rr) "Fixed Rate Prepayment Premium" means the greater of:
(i) one percent (1%) of the amount of the principal balance of the
Fixed Rate Loan being prepaid; or
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(ii) the product of (x) a fraction whose numerator is an amount equal
to the principal amount of the Fixed Rate Loan being prepaid and whose
denominator is the outstanding principal balance of the Fixed Rate Loan on
the date of such prepayment (before giving effect to such prepayment),
multiplied by (y) an amount equal to the remainder obtained by subtracting
(a) an amount equal to the outstanding principal amount of the Fixed Rate
Loan as the date of such prepayment (before giving effect to such
prepayment) from (b) the present value as of the date of such prepayment
of the remaining scheduled payments of principal and interest on the Fixed
Rate Loan (before giving effect to such prepayment) determined by
discounting such payments at the Discount Rate.
(ss) "GAAP" shall mean United States generally accepted accounting principles
consistently applied.
(tt) "Government" shall have the meaning assigned in clause (ix) of the
definition of Eligible Accounts.
(uu) "Hazardous Material" shall mean any chemical, compound, material,
mixture or substance: (i) the presence of which requires or may hereafter
require notification, investigation, monitoring or remediation under any
Environmental Law; (ii) which is or becomes defined as a "hazardous waste",
"hazardous material" or "hazardous substance" or "toxic substance" or
"pollutant" or contaminant" under any present or future applicable federal,
state or local law or under the rules and regulations adopted or promulgated
pursuant thereto, including, without limitation, the Environmental Laws; (iii)
which is toxic, explosive, corrosive, reactive, ignitable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes
regulated by any governmental authority, agency, department, commission, board,
agency or instrumentality of any foreign country, the United States, any state
of the United States, or any political subdivision thereof to the extent any of
the foregoing has or had jurisdiction over Borrower; (iv) which contains without
limitation, gasoline, diesel fuel or other petroleum products, asbestos or
polychlorinated biphenyls ("PCBs"); or (v) any other chemical, material or
substance, exposure to, or disposal of, which is now or hereafter prohibited,
limited or regulated by any federal, state or local governmental body,
instrumentality or agency.
(vv) "Indebtedness" shall mean all obligations that in accordance with GAAP
should be classified as liabilities upon Borrower's balance sheet or to which
reference should be made by footnotes thereto.
(ww) "Indemnifiable Liability" shall have the same meaning assigned in
Section 18.1(a) hereof.
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(xx) "Indemnitees" shall have the meanings assigned in Section 18.1(a)
hereof.
(yy) "Initial Converted Equipment Loan" shall have the meaning assigned
in Section 4.7 hereof.
(zz) "Initial Converted Equipment Loan Maturity Date" shall mean June 30,
2002.
(aaa) "Initial Converted Equipment Loan Note" shall have the meaning assigned
in Section 4.7 hereof.
(bbb) "Initial Equipment Loan" and "Initial Equipment Loans" shall have the
meanings assigned in Section 4.1 hereof.
(ccc) "Initial Equipment Loan Conversion Date" shall mean July 1, 1999.
(ddd) "Intangible Assets" shall mean assets that in accordance with GAAP are
properly classifiable as intangible assets, including but not limited to,
goodwill, franchises, licenses, patents, trademarks, tradenames and copyrights.
(eee) "Interest" shall mean, for the applicable period, all interest paid or
payable, including but not limited to, interest paid or payable on Indebtedness
and on Capital Leases, determined in accordance with GAAP.
(fff) "Interest Period" shall mean:
(i) with respect to each LIBOR Rate Loan, the period commencing on the
date of such LIBOR Rate Loan and ending thirty (30), sixty (60) or ninety
(90) days thereafter, as the Borrower may elect in the applicable Election
Notice;
(ii) with respect to any Fixed Rate Loan, a period of not less than one
(1) year and not more than a term expiring on (a) the Initial Converted
Equipment Loan Maturity Date, in the case of any Initial Converted
Equipment Loan, (b) the Subsequent Converted Equipment Loan Maturity Date,
in the case of any Subsequent Converted Equipment Loan, (c) the Final
Converted Equipment Loan Maturity Date, in the case of any Final Converted
Equipment Loan, and (d) the Term Loan Maturity Date, in the case of the
Term Loan;
(iii) with respect to each Prime Rate Loan, on the date of such Prime
Rate Loan and ending if and when it becomes a LIBOR Rate Loan pursuant to
Section 7.2 hereof; provided, that:
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(A) any Interest Period that would otherwise end on a day that is
not a Business Day shall be extended to the next succeeding Business
Day unless, in the case of a LIBOR Rate Loan, such Business Day
falls in the next calendar month, in which case such Interest Period
shall end on the immediately preceding Business Day;
(B) any Interest Period applicable to a LIBOR Rate Loan that
begins on the last 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) shall, subject to clause
(iii) below, end on the last Business Day of a calendar month;
(C) the Borrower may not elect an Interest Period for a LIBOR
Rate Loan which would otherwise end: (a) after the conclusion of the
Revolving Loan Term, in the case of any Revolving Loan, (b) after
the Initial Equipment Loan Conversion Date, in the case of any
Initial Equipment Loan, (c) after the Subsequent Equipment Loan
Conversion Date, in the case of any Subsequent Equipment Loan, and
(d) after the Final Equipment Loan Conversion Date, in the case of
any Final Equipment Loan; and
(iv) There shall be no more than three (3) different Interest
Periods outstanding at any time, and the amount to be subject to any
LIBOR Rate or Fixed Rate shall be in an amount at least equal to
$250,000 and in increments of $250,000, provided, however, that the
Lender may, in its sole discretion, permit the Borrower to elect
amounts to be subject to such interest rates which are not in
increments of $250,000.
(ggg) "Inventory" shall have the meaning assigned in Section 12.1(d) hereof.
(hhh) "Lessor's Agreements" shall have the meaning assigned in Section
10.1(f) hereof.
(iii) "Leverage Ratio" shall mean, during the applicable period, that
quotient equal to Total Funded Debt, divided by EBITDA.
(jjj) "LIBOR" or "LIBOR Rate" shall mean for any LIBOR Rate Loan for the then
current Interest Period relating thereto, the rate per annum determined pursuant
to the following formula:
LIBOR = LIBOR Base Rate
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1-Reserve Percentage
with "LIBOR Base Rate" meaning the rate of interest determined by the Lender
to be the prevailing rate per annum at which deposits in U.S. dollars are
offered to the Lender by first class banks in the Interbank LIBOR market in
which it regularly participates on or about 10:00 a.m. (Hartford time) two (2)
Business Days before the first day of such Interest Period in an amount equal to
the principal amount of such LIBOR Loan to which such Interest Period is to
apply for a period of time approximately equal to such Interest Period, and with
"Reserve Percentage" meaning the rate (expressed as a decimal) applicable to the
Lender during such Interest Period under regulations issued from time to time by
the Board of Governors of the Federal Reserve System (or any successor) for
determining the actual reserve requirement (including without limitation, any
basic, supplemental, emergency or marginal reserve requirement) of the Lender
with respect to "Eurocurrency liabilities" as that term is defined under such
regulations.
The LIBOR Rate shall be adjusted automatically as of the effective date of
any change in the Reserve Percentage.
(kkk) "LIBOR Rate Loan" shall mean the Revolving Loan, the Initial
Equipment Loan, the Subsequent Equipment Loan or the Final Equipment Loan in
the event the Borrower elects an interest rate applicable thereto based upon
the LIBOR Rate.
(lll) "Life Insurance Assignment" shall have the meaning assigned in
Section 10.1(d) hereof.
(mmm) "Loan" means a Revolving Loan, the Term Loan, an Equipment Loan, or
a Converted Equipment Loan, and "Loans" means the Revolving Loans, the Term
Loan, the Equipment Loans, and the Converted Equipment Loans.
(nnn) "Lockbox Agreement" shall have the meaning assigned in Section
14.1(m) hereof.
(ooo) "Note" means the Revolving Loan Note, the Term Loan Note, the
Equipment Loan Note, the Initial Converted Equipment Loan Note, the
Subsequent Converted Equipment Loan Note or the Final Converted Equipment
Loan Note, and "Notes" means the Revolving Loan Note, the Term Loan Note, the
Equipment Loan Note, the Initial Converted Equipment Loan Note, the
Subsequent Converted Equipment Loan Note and the Final Converted Equipment
Loan Note.
(ppp) "Notice of Revolving Loan Borrowing" shall have the meaning assigned
in Section 2.2 hereof.
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(qqq) "Notice of Equipment Loan Borrowing" shall have the meaning assigned
in Section 4.2 hereof.
(rrr) "Obligation" and "Obligations" mean and include all loans advances,
interest, indebtedness, liabilities, obligations, fees, charges, expenses,
guaranties, covenants and duties at any time owing by Borrower to Lender of
every kind and description, whether or not evidenced by any note or other
instrument, whether or not for the payment of money, whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, including, but not limited to, the Loans, and all other
indebtedness, liabilities and obligations of Borrower arising under this
Agreement and the other Financing Agreements or otherwise, and all reasonable
costs, expenses, fees, charges incurred by Lender hereunder or otherwise with
respect to Borrower, including, without limitation, reasonable fees and
expenses of attorneys, paralegals and other professionals incurred in
connection with any of the foregoing, or in any way connected with, involving
or relating to the preservation, enforcement, protection or defense of, or
realization under this Agreement, any of the other Financing Agreements, any
related agreement, document or instrument, the Collateral and the rights and
remedies hereunder or thereunder, including without limitation, all
reasonable costs, expenses and fees incurred in inspecting or surveying
mortgaged real estate, if any, or conducting Environmental studies or tests,
and all reasonable costs, expenses and fees incurred in connection with any
"workout" or default resolution negotiations involving legal counsel or other
professionals and further in connection with any modification, renegotiation
or restructuring of the indebtedness evidenced by this Agreement and/or any
of the other Financing Agreements and/or Obligations.
(sss) "Patent Security Agreement" shall have the meaning assigned in
Section 10.1(j) hereof.
(ttt) "Plan" means any employee benefit plan or other plan maintained by
Borrower or any entity affiliated with Borrower for employees covered by
Title I of ERISA.
(uuu) "Premises" shall mean the real property located at 57 Commerce
Drive, Brookfield, Connecticut and 4065 Campbell Avenue, San Mateo County,
Menlo Park, California.
(vvv) "Prime Rate" shall mean the Prime Rate as published from time to
time in the "Money Rates" section of The Wall Street Journal or any successor
publication, or in the event that such rate is no longer published in The
Wall Street Journal, a comparable index or reference selected by Lender. The
Prime Rate need not and may not necessarily be the lowest or most favorable
rate.
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(www) "Prime Rate Loan" shall mean any Loan which the Borrower has
selected an interest rate based upon the Prime Rate.
(xxx) "Product Line" shall have the meaning assigned in Section 12.1
hereof.
(yyy) "Receivables" shall have the meaning assigned in Section 12.1(a)
hereof.
(zzz) "Release" shall mean any release, emission, disposal, leaching or
migration into the environment (including, without limitation, the
abandonment or disposal of any barrels, containers, or other closed
receptacles containing any Hazardous Materials) or into or out of any
property owned, occupied or used by Borrower.
(aaaa) "Revolving Loan" and "Revolving Loans" shall have the meanings
assigned in Section 2.1 hereof.
(bbbb) "Revolving Loan Account" shall have the meaning assigned in Section
2.2 hereof.
(cccc) "Revolving Loan Borrowing Base" shall mean an amount equal to the
lesser of: (i) Three Million Dollars ($3,000,000) or (ii) an amount equal to
the aggregate of (1) eighty percent (80%) of Eligible Accounts and (2) the
lesser of (A) thirty-five percent (35%) of Eligible Inventory, or (B) Seven
Hundred Fifty Thousand Dollars ($750,000).
(dddd) "Revolving Loan Note" shall have the meaning assigned in Section
2.2 hereof.
(eeee) "Revolving Loan Term" shall have the meaning assigned in Section
17.1(a) hereof.
(ffff) "Subsequent Converted Equipment Loan" shall have the meaning
assigned in Section 5.7 hereof.
(gggg) "Subsequent Converted Equipment Loan Maturity Date" shall mean June
30, 2003.
(hhhh) "Subsequent Converted Equipment Loan Note" shall have the meaning
assigned in Section 5.7 hereof.
(iiii) "Subsequent Equipment Loan" and "Subsequent Equipment Loans" shall
have the meanings assigned in Section 5.1 hereof.
(jjjj) "Subsequent Equipment Loan Conversion Date" shall mean July 1,
2000.
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(kkkk) "Subsidiary" and "Subsidiaries" shall mean any corporation or
corporations of which the outstanding shares of any stock having ordinary
voting power is at the time owned by Borrower and/or by one or more
Subsidiaries.
(llll) "Tangible Net Worth" shall mean Total Assets minus the sum of (i)
Total Liabilities, and (ii) Intangible Assets.
(mmmm) "Term Loan" shall have the meaning assigned in Section 3.1 hereof.
(nnnn) "Term Loan Maturity Date" shall mean June 30, 2003.
(oooo) "Termination Fee" shall have the meaning assigned in Section 7.7
hereof.
(pppp) "Term Loan Note" shall have the meaning assigned in Section 3.1
hereof.
(qqqq) "Total Assets" shall mean total assets determined in accordance
with GAAP.
(rrrr) "Total Funded Debt" shall mean all Indebtedness of Borrower
pursuant to any agreement or instrument to which the Borrower is a party
relating to the borrowing of money or the obtaining of credit or in respect
of Capitalized Leases.
(ssss) "Total Liabilities" shall mean total current Indebtedness
determined in accordance with GAAP.
(tttt) "Trademark Security Agreement" shall have the meaning assigned in
Section 10.1(k) hereof.
(uuuu) "Treasury Rate" means the yield calculated by the linear
interpolation of the yield, as reported in Federal Reserve Statistical
Release H.15-Selected Interest Rates under the heading "U.S. Government
Securities/Treasury Constant Maturities" for the week ending prior to the
date of the relevant prepayment, of United States Treasury constant
maturities with a maturity date (one longer and one shorter) most nearly
approximating the end of the Interest Period in which the prepayment is made.
ARTICLE II. Revolving Loans
Section 2.1. Amounts. Subject to the terms and conditions contained in
this Agreement, and so long as no Defaulting Event has occurred, Lender
agrees, in its sole but reasonable discretion, to make and remake loans
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(collectively, the "Revolving Loans" and, individually, a "Revolving Loan") to
Borrower from time to time until terminated as provided below in principal
amounts not exceeding in the aggregate at any one time outstanding the Revolving
Loan Borrowing Base, it being agreed and understood that at no time shall the
maximum aggregate principal amount of the Revolving Loans made by Lender exceed
the Revolving Loan Borrowing Base.
Section 2.2. Procedure For Advances, Notice of Revolving Loan Borrowing,
Revolving Loan Note, Etc. Within the limits of the Revolving Loan Borrowing Base
and the Revolving Loan Term, so long as Borrower is in compliance with all of
the terms and conditions of this Agreement and no Defaulting Event has occurred,
Borrower may request borrowings and may repay and request reborrowings of
Revolving Loans. Whenever Borrower desires an advance, Borrower shall notify
Lender (which notice shall be irrevocable) by telecopy or telephone of the
proposed borrowing. Such notice (each, a "Notice of Revolving Loan Borrowing")
shall be accompanied by a borrowing base certificate (in a form acceptable to
Lender), specify the date of the proposed borrowing, the type of borrowing, the
amount proposed to be borrowed and, if a LIBOR Rate Loan is being requested, the
duration of the Interest Period. Each Notice of Revolving Loan Borrowing must be
received by Lender no later than 11:00 a.m., Hartford, Connecticut time on the
day such borrowing is requested. In addition to this Agreement, the Revolving
Loans shall be evidenced by a Revolving Promissory Note payable to Lender in the
form of Exhibit A attached hereto (the "Revolving Loan Note"). Insofar as
Borrower may request and Lender shall make Revolving Loans hereunder, Lender
shall enter such advances as debits on a revolving loan account maintained by
Borrower with Lender (the "Revolving Loan Account"). Lender may also record to
the Revolving Loan Account, in accordance with customary accounting practices
and procedures, (i) all fees, accrued and unpaid interest, late fees, usual and
customary charges for the maintenance and administration of checking and any
other accounts maintained by Borrower with Lender, and other fees and charges
which are properly chargeable to Borrower under this Agreement, (ii) all
payments, subject to collection, made by or account of indebtedness evidenced by
the Revolving Loan Account, (iii) all proceeds of Collateral which are finally
paid to Lender in its own office in cash or collected items, and (iv)other
appropriate debits and credits, including without limitation, payments of
interest due hereunder.
Section 2.3. Monthly Statements. On a monthly basis, Lender shall render a
statement for the Revolving Loan Account, which statement shall be considered
correct and accepted by Borrower and conclusively binding upon Borrower unless
Borrower notifies Lender to the contrary within ten (10) days of the receipt of
said statement by Borrower. Lender shall have the right to debit the Revolving
Loan Account for all interest charges on the Revolving Loan as
<PAGE>
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and when the same shall be due and payable, if not otherwise paid by Borrower,
subject to applicable law.
Section 2.4. Interest Periods. The Borrower shall elect the initial Interest
Period applicable to a Revolving Loan which is a LIBOR Rate Loan in its Notice
of Revolving Loan Borrowing. The Borrower shall elect the duration of each
succeeding Interest Period by giving irrevocable written notice to Lender of
such duration not less than three (3) Business Days prior to the last day of the
then current Interest Period applicable to such LIBOR Rate Loan. If the Lender
does not receive timely notice of the Interest Period elected by the Borrower,
the Borrower shall be deemed to have elected to convert to a Prime Rate Loan
subject to Section 7.2 below.
Section 2.5. Lender Discretion. Nothing herein shall be construed to (a)
require Lender to make Revolving Loans, and/or (b) prohibit Lender from lending
in excess of the Revolving Loan Borrowing Base, it being agreed that all such
loans and advances shall be at Lender's sole (but in the case of (a) above,
reasonable) discretion and shall not establish a pattern or custom binding upon
Lender.
ARTICLE III. Term Loan
Section 3.1. Amount. Subject to the terms and conditions contained in this
Agreement, Lender agrees to make a loan to Borrower in the original principal
amount of $500,000 (the "Term Loan"). In addition to this Agreement, the Term
Loan shall be evidenced by a Term Loan Note payable to Lender in the form of
Exhibit B attached hereto (the "Term Loan Note").
Section 3.2. Notice and Manner of Establishing Interest Rate. Whenever the
Borrower desires to have the Term Loan accrue interest as a Fixed Rate Loan, the
Borrower shall give the Lender written notice at least three (3) Business Days
prior to the day on which the requested Fixed Rate Loan is to take effect. Such
notice (an "Election Notice") shall specify the effective date of the Fixed Rate
Loan and the duration of the initial Interest Period. The Borrower shall elect
the duration of each succeeding Interest Period by giving irrevocable written
notice to Lender of such duration not less than three (3) Business Days prior to
the last day of the then current Interest Period applicable to such Fixed Rate
Loan. If the Lender does not receive timely notice of the Interest Period
elected by the Borrower, the Borrower shall be deemed to have elected to convert
to a Prime Rate Loan subject to Section 7.2 below.
Section 3.3. Monthly Statements. On a monthly basis, Lender shall render a
statement for the Term Loan, which statement shall be considered correct and
accepted by Borrower and conclusively binding upon Borrower unless Borrower
notifies Lender to the contrary within ten (10) days of
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the receipt of said statement by Borrower. Lender shall have the right to debit
any account of Borrower for all principal, interest and other charges on the
Term Loan as and when the same shall be due and payable, if not otherwise paid
by Borrower.
ARTICLE IV. Initial Equipment Loan; Initial Converted Equipment Loan
Section 4.1. Amount. Subject to the terms and conditions contained in this
Agreement and so long as no Defaulting Event has occurred, Lender agrees to make
loans (collectively, the "Initial Equipment Loans" and, individually, an
"Initial Equipment Loan") to Borrower from time to time until terminated as
provided below in principal amounts not exceeding in the aggregate at any one
time outstanding the Equipment Loan Borrowing Base, it being agreed and
understood that at no time shall the maximum aggregate principal amount of the
Equipment Loans made by Lender exceed the Equipment Loan Borrowing Base.
Section 4.2. Procedure For Advances; Equipment Loan Notice of Borrowing;
Equipment Loan Note, Etc. Within the limits of the Equipment Loan Borrowing
Base, so long as Borrower is in compliance with all of the terms and conditions
of this Agreement and no Defaulting Event has occurred, Borrower may request
borrowings and repay BUT NOT REBORROW Initial Equipment Loans. To be eligible to
obtain any Initial Equipment Loan, Borrower must submit to Lender at least three
(3) Business Days prior to the date on which Borrower requests Lender to make
such Initial Equipment Loan, enforceable at the sole option of Lender: (a)
copies of invoices which reflect the actual cost of the Eligible Equipment being
purchased with the proceeds of such Initial Equipment Loan, including, if any,
installation and other services and costs associated therewith; (b) evidence
satisfactory to Lender that upon payment of the purchase price therefor, the
Eligible Equipment shall be in the Borrower's physical possession and that (1)
the Borrower has acquired good title to such Eligible Equipment, and (2) such
Eligible Equipment is not subject to any pledge, lien, lease, encumbrance or
charge of any kind whatsoever, other than in favor of Lender. Whenever Borrower
desires an advance, Borrower shall notify Lender (which notice shall be
irrevocable) by telecopy or telephone of the proposed borrowing. Such notice
(each, a "Notice of Equipment Loan Borrowing") shall specify the date of the
proposed borrowing, the type of borrowing, the amount proposed to be borrowed,
and if a LIBOR Rate Loan, the duration of the Interest Period. Each Notice of
Equipment Loan Borrowing must be received by Lender no later than 11:00 a.m.,
Hartford, Connecticut time on the day such borrowing is requested. In addition
to this Agreement, the Initial Equipment Loans shall be evidenced by an
Equipment Loan Note payable to Lender in the form of Exhibit C attached hereto
(the "Equipment Loan Note"). Insofar as Borrower may request and Lender shall
make Initial
<PAGE>
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Equipment Loans hereunder, Lender shall enter such advances as debits on an
equipment loan account maintained by Borrower with Lender (the "Equipment Loan
Account"). Lender may also record to the Equipment Loan Account, in accordance
with customary accounting practices and procedures, (i) all fees, accrued and
unpaid interest, late fees, usual and customary charges for the maintenance and
administration of checking and any other accounts maintained by Borrower with
Lender, and other fees and charges which are properly chargeable to Borrower
under this Agreement, (ii) all payments, subject to collection, made by or
account of indebtedness evidenced by the Equipment Loan Account, (iii) all
proceeds of Collateral which are finally paid to Lender in its own office in
cash or collected items, and (iv) other appropriate debits and credits,
including without limitation, payments of interest due hereunder.
Section 4.3. Interest Periods for Initial Equipment Loans. The Borrower shall
elect the initial Interest Period applicable to an Initial Equipment Loan which
is a LIBOR Rate Loan in its Notice of Equipment Loan Borrowing. The Borrower
shall elect the duration of each succeeding Interest Period by giving
irrevocable written notice to Lender of such duration not less than three (3)
Business Days prior to the last day of the then current Interest Period
applicable to such LIBOR Rate Loan. If the Lender does not receive timely notice
of the Interest Period elected by the Borrower, the Borrower shall be deemed to
have elected to convert to a Prime Rate Loan subject to Section 7.2 below.
Section 4.4. Notice and Manner of Establishing Interest Rate for Initial
Converted Equipment Loans. Whenever the Borrower desires to have the Initial
Converted Equipment Loan accrue interest as a Fixed Rate Loan, the Borrower
shall give the Lender written notice at least three (3) Business Days prior to
the day in which the requested Fixed Rate Loan is to take effect. Such notice
(an "Election Notice") shall specify the effective date of the Fixed Rate Loan
and the duration of the initial Interest Period. The Borrower shall elect the
duration of each succeeding Interest Period by giving irrevocable written notice
to Lender of such duration not less than three (3) Business Days prior to the
last day of the then current Interest Period applicable to such Fixed Rate Loan.
If the Lender does not receive timely notice of the Interest Period elected by
the Borrower, the Borrower shall be deemed to have elected to convert to a Prime
Rate Loan subject to Section 7.2 below.
Section 4.5. Monthly Statements. On a monthly basis, Lender shall render a
statement for the Equipment Loan Account, which statement shall be considered
correct and accepted by Borrower and conclusively binding upon Borrower unless
Borrower notifies Lender to the contrary within ten (10) days of the receipt of
said statement by Borrower. Lender shall have the right to debit the Equipment
Loan Account for all interest charges on the Initial
<PAGE>
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Equipment Loans as and when the same shall be due and payable, if not otherwise
paid by Borrower, subject to applicable law.
Section 4.6. Lender Discretion. Nothing herein shall be construed to prohibit
Lender from lending in excess of the Equipment Loan Borrowing Base, it being
agreed that all such loans and advances shall be at Lender's sole discretion and
shall not establish a pattern or custom binding upon Lender.
Section 4.7. Conversion to Initial Converted Equipment Loan. Notwithstanding
anything to the contrary contained herein, so long as Borrower is in compliance
with all of the terms and conditions of this Agreement and no Defaulting Event
has occurred, on the Initial Equipment Loan Conversion Date, the then
outstanding principal balance of the Initial Equipment Loans shall convert into
term indebtedness having a final maturity on the Initial Converted Equipment
Loan Maturity Date (the "Initial Converted Equipment Loan"). The Initial
Converted Equipment Loan shall bear interest at a rate determined in accordance
with Section 7.1(a)(iv) hereof, and be payable in thirty-six (36) substantially
equal, consecutive monthly payments of principal in accordance with the terms
and conditions of an Initial Converted Equipment Loan Note payable to Lender in
the form of Exhibit D attached hereto (the "Initial Converted Equipment Loan
Note"). On the Initial Equipment Loan Conversion Date, Borrower shall execute
and/or deliver, or cause to be delivered to Lender an Initial Converted
Equipment Loan Note and such other instruments, documents and agreements as
Lender reasonably requires, all in form, scope and substance satisfactory to
Lender. On and after the Initial Equipment Loan Conversion Date, Borrower shall
have no ability to request, and Lender shall have no obligation to make, any
further Initial Equipment Loans.
ARTICLE V. Subsequent Equipment Loan; Subsequent Converted Equipment Loan
Section 5.1. Amount. Subject to the terms and conditions contained in this
Agreement and so long as no Defaulting Event has occurred, Lender agrees to make
loans (collectively, the "Subsequent Equipment Loans" and, individually, a
"Subsequent Equipment Loan") to Borrower from time to time until terminated as
provided below in principal amounts not exceeding in the aggregate at any one
time outstanding the Equipment Loan Borrowing Base, it being agreed and
understood that at no time shall the maximum aggregate principal amount of the
Equipment Loans made by Lender exceed the Equipment Loan Borrowing Base.
Section 5.2. Procedure For Advances; Equipment Loan Notice of Borrowing;
Subsequent Equipment Loan Note, Etc. Within the
<PAGE>
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limits of the Equipment Loan Borrowing Base, so long as Borrower is in
compliance with all of the terms and conditions of this Agreement and no
Defaulting Event has occurred, and so long as the entire outstanding principal
balance of the Initial Equipment Loans has converted into an Initial Converted
Equipment Loan in accordance with Section 4.7 hereof, Borrower may request
borrowings and repay BUT NOT REBORROW Subsequent Equipment Loans. To be eligible
to obtain any Subsequent Equipment Loan, Borrower must submit to Lender at least
three (3) Business Days prior to the date on which Borrower requests Lender to
make such Subsequent Equipment Loan, enforceable at the sole option of Lender:
(a) copies of invoices which reflect the actual cost of the Eligible Equipment
being purchased with the proceeds of such Subsequent Equipment Loan, including,
if any, installation and other services and costs associated therewith; (b)
evidence satisfactory to Lender that upon payment of the purchase price
therefor, the Eligible Equipment shall be in the Borrower's physical possession
and that (1) the Borrower has acquired good title to such Eligible Equipment,
and (2) such Eligible Equipment is not subject to any pledge, lien, lease,
encumbrance or charge of any kind whatsoever, other than in favor of Lender.
Whenever Borrower desires an advance, Borrower shall notify Lender (which notice
shall be irrevocable) pursuant to a Notice of Equipment Loan Borrowing. Each
Notice of Equipment Loan Borrowing shall specify the date of the proposed
borrowing, the type of borrowing, the amount proposed to be borrowed, and if a
LIBOR Rate Loan, the duration of the Interest Period. Each Notice of Equipment
Loan Borrowing must be received by Lender no later than 11:00 a.m., Hartford,
Connecticut time on the day such borrowing is requested. In addition to this
Agreement, the Subsequent Equipment Loans shall be evidenced by the Equipment
Loan Note. Insofar as Borrower may request and Lender shall make Subsequent
Equipment Loans hereunder, Lender shall enter such advances as debits on the
Equipment Loan Account. Lender may also record to the Equipment Loan Account, in
accordance with customary accounting practices and procedures, (i) all fees,
accrued and unpaid interest, late fees, usual and customary charges for the
maintenance and administration of checking and any other accounts maintained by
Borrower with Lender, and other fees and charges which are properly chargeable
to Borrower under this Agreement, (ii) all payments, subject to collection, made
by or account of indebtedness evidenced by the Equipment Loan Account, (iii) all
proceeds of Collateral which are finally paid to Lender in its own office in
cash or collected items, and (iv) other appropriate debits and credits,
including without limitation, payments of interest due hereunder.
Section 5.3. Interest Periods for Subsequent Equipment Loans. The Borrower
shall elect the initial Interest Period applicable to a Subsequent Equipment
Loan which is a LIBOR Rate Loan in its Notice of Equipment Loan Borrowing. The
Borrower shall elect the duration of each succeeding Interest Period by giving
irrevocable written notice to Lender of such duration not less than three (3)
Business Days prior to the last day of the then
<PAGE>
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current Interest Period applicable to such LIBOR Rate Loan. If the Lender does
not receive timely notice of the Interest Period elected by the Borrower, the
Borrower shall be deemed to have elected to convert to a Prime Rate Loan subject
to Section 7.2 below.
Section 5.4. Notice and Manner of Establishing Interest Rate for Subsequent
Converted Equipment Loans. Whenever the Borrower desires to have the Subsequent
Converted Equipment Loan accrue interest as a Fixed Rate Loan, the Borrower
shall give the Lender written notice at least three (3) Business Days prior to
the day in which the requested Fixed Rate Loan is to take effect. Such notice
(an "Election Notice") shall specify the effective date of the Fixed Rate Loan
and the duration of the initial Interest Period. The Borrower shall elect the
duration of each succeeding Interest Period by giving irrevocable written notice
to Lender of such duration not less than three (3) Business Days prior to the
last day of the then current Interest Period applicable to such Fixed Rate Loan.
If the Lender does not receive timely notice of the Interest Period elected by
the Borrower, the Borrower shall be deemed to have elected to convert to a Prime
Rate Loan subject to Section 7.2 below.
Section 5.5. Monthly Statements. On a monthly basis, Lender shall render a
statement for the Equipment Loan Account, which statement shall be considered
correct and accepted by Borrower and conclusively binding upon Borrower unless
Borrower notifies Lender to the contrary within ten (10) days of the receipt of
said statement by Borrower. Lender shall have the right to debit the Equipment
Loan Account for all interest charges on the Subsequent Equipment Loans as and
when the same shall be due and payable, if not otherwise paid by Borrower,
subject to applicable law.
Section 5.6. Lender Discretion. Nothing herein shall be construed to prohibit
Lender from lending in excess of the Equipment Loan Borrowing Base, it being
agreed that all such loans and advances shall be at Lender's sole discretion and
shall not establish a pattern or custom binding upon Lender.
Section 5.7. Conversion to Subsequent Converted Equipment Loan.
Notwithstanding anything to the contrary contained herein, so long as Borrower
is in compliance with all of the terms and conditions of this Agreement and no
Defaulting Event has occurred, on the Subsequent Equipment Loan Conversion Date,
the then outstanding principal balance of the Subsequent Equipment Loans shall
convert into term indebtedness having a final maturity on the Subsequent
Converted Equipment Loan Maturity Date (the "Subsequent Converted Equipment
Loan"). The Subsequent Converted Equipment Loan shall bear interest at a rate
determined in accordance with Section 7.1(a)(vi) hereof, and be payable in
thirty-six (36) substantially equal, consecutive monthly payments of principal
in accordance with the terms and
<PAGE>
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conditions of a Subsequent Converted Equipment Loan Note payable to Lender in
the form of Exhibit E attached hereto (the "Subsequent Converted Equipment Loan
Note"). On the Subsequent Equipment Loan Conversion Date, Borrower shall execute
and/or deliver, or cause to be delivered to Lender a Subsequent Converted
Equipment Loan Note and such other instruments, documents and agreements as
Lender reasonably requires, all in form, scope and substance satisfactory to
Lender. On and after the Subsequent Equipment Loan Conversion Date, Borrower
shall have no ability to request, and Lender shall have no obligation to make,
any further Subsequent Equipment Loans.
ARTICLE VI. Final Equipment Loan; Final Converted Equipment Loan
Section 6.1. Amount. Subject to the terms and conditions contained in this
Agreement and so long as no Defaulting Event has occurred, Lender agrees to make
loans (collectively, the "Final Equipment Loans" and, individually, an "Final
Equipment Loan") to Borrower from time to time until terminated as provided
below in principal amounts not exceeding in the aggregate at any one time
outstanding the Equipment Loan Borrowing Base, it being agreed and understood
that at no time shall the maximum aggregate principal amount of the Equipment
Loans made by Lender exceed the Equipment Loan Borrowing Base.
Section 6.2. Procedure For Advances; Equipment Loan Notice of Borrowing;
Final Equipment Loan Note, Etc. Within the limits of the Equipment Loan
Borrowing Base, so long as Borrower is in compliance with all of the terms and
conditions of this Agreement and no Defaulting Event has occurred, and so long
as the entire outstanding principal balance of the Initial Equipment Loans and
the Subsequent Equipment Loans has converted into an Initial Converted Equipment
Loan and a Subsequent Equipment Loan in accordance with Sections 4.7 and 5.7
hereof, respectively, Borrower may request borrowings and repay BUT NOT REBORROW
Final Equipment Loans. To be eligible to obtain any Final Equipment Loan,
Borrower must submit to Lender at least three (3) Business Days prior to the
date on which Borrower requests Lender to make such Final Equipment Loan,
enforceable at the sole option of Lender: (a) copies of invoices which reflect
the actual cost of the Eligible Equipment being purchased with the proceeds of
such Final Equipment Loan, including, if any, installation and other services
and costs associated therewith; (b) evidence satisfactory to Lender that upon
payment of the purchase price therefor, the Eligible Equipment shall be in the
Borrower's physical possession and that (1) the Borrower has acquired good title
to such Eligible Equipment, and (2) such Eligible Equipment is not subject to
any pledge, lien, lease, encumbrance or charge of any kind whatsoever, other
than in favor of Lender. Whenever Borrower desires an advance, Borrower shall
notify Lender (which notice shall be irrevocable) pursuant to a Notice of
Equipment Loan Borrowing.
<PAGE>
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Each Notice of Equipment Loan Borrowing shall specify the date of the proposed
borrowing, the type of borrowing, the amount proposed to be borrowed, and if a
LIBOR Rate Loan, the duration of the Interest Period. Each Notice of Equipment
Loan Borrowing must be received by Lender no later than 11:00 a.m., Hartford,
Connecticut time on the day such borrowing is requested. In addition to this
Agreement, the Final Equipment Loans shall be evidenced by the Equipment Loan
Note. Insofar as Borrower may request and Lender shall make Final Equipment
Loans hereunder, Lender shall enter such advances as debits on the Equipment
Loan Account. Lender may also record to the Equipment Loan Account, in
accordance with customary accounting practices and procedures, (i) all fees,
accrued and unpaid interest, late fees, usual and customary charges for the
maintenance and administration of checking and any other accounts maintained by
Borrower with Lender, and other fees and charges which are properly chargeable
to Borrower under this Agreement, (ii) all payments, subject to collection, made
by or account of indebtedness evidenced by the Equipment Loan Account, (iii) all
proceeds of Collateral which are finally paid to Lender in its own office in
cash or collected items, and (iv) other appropriate debits and credits,
including without limitation, payments of interest due hereunder.
Section 6.3. Interest Periods for Final Equipment Loans. The Borrower shall
elect the initial Interest Period applicable to a Final Equipment Loan which is
a LIBOR Rate Loan in its Notice of Equipment Loan Borrowing. The Borrower shall
elect the duration of each succeeding Interest Period by giving irrevocable
written notice to Lender of such duration not less than three (3) Business Days
prior to the last day of the then current Interest Period applicable to such
LIBOR Rate Loan. If the Lender does not receive timely notice of the Interest
Period elected by the Borrower, the Borrower shall be deemed to have elected to
convert to a Prime Rate Loan subject to Section 7.2 below.
<PAGE>
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Section 6.4. Notice and Manner of Establishing Interest Rate for Final
Converted Equipment Loans. Whenever the Borrower desires to have the Final
Converted Equipment Loan accrue interest as a Fixed Rate Loan, the Borrower
shall give the Lender written notice at least three (3) Business Days prior to
the day in which the requested Fixed Rate Loan is to take effect. Such notice
(an "Election Notice") shall specify the effective date of the Fixed Rate Loan
and the duration of the initial Interest Period. The Borrower shall elect the
duration of each succeeding Interest Period by giving irrevocable written notice
to Lender of such duration not less than three (3) Business Days prior to the
last day of the then current Interest Period applicable to such Fixed Rate Loan.
If the Lender does not receive timely notice of the Interest Period elected by
the Borrower, the Borrower shall be deemed to have elected to convert to a Prime
Rate Loan subject to Section 7.2 below.
Section 6.5. Monthly Statements. On a monthly basis, Lender shall render a
statement for the Equipment Loan Account, which statement shall be considered
correct and accepted by Borrower and conclusively binding upon Borrower unless
Borrower notifies Lender to the contrary within ten (10) days of the receipt of
said statement by Borrower. Lender shall have the right to debit the Equipment
Loan Account for all interest charges on the Final Equipment Loans as and when
the same shall be due and payable, if not otherwise paid by Borrower, subject to
applicable law.
Section 6.6. Lender Discretion. Nothing herein shall be construed to prohibit
Lender from lending in excess of the Equipment Loan Borrowing Base, it being
agreed that all such loans and advances shall be at Lender's sole discretion and
shall not establish a pattern or custom binding upon Lender.
Section 6.7. Conversion to Final Converted Equipment Loan. Notwithstanding
anything to the contrary contained herein, so long as Borrower is in compliance
with all of the terms and conditions of this Agreement and no Defaulting Event
has occurred, on the Final Equipment Loan Conversion Date, the then outstanding
principal balance of the Final Equipment Loans shall convert into term
indebtedness having a final maturity on the Final Converted Equipment Loan
Maturity Date (the "Final Converted Equipment Loan"). The Final Converted
Equipment Loan shall bear interest at a rate determined in accordance with
Section 7.1(a)(viii) hereof, and be payable in thirty-six (36) substantially
equal, consecutive monthly payments of principal in accordance with the terms
and conditions of a Final Converted Equipment Loan Note payable to Lender in the
form of Exhibit F attached hereto (the "Final Converted Equipment Loan Note").
On the Final Equipment Loan Conversion Date, Borrower shall execute and/or
deliver, or cause to be delivered to Lender a Final Converted Equipment Loan
Note and such other instruments, documents and agreements as Lender reasonably
requires, all in form, scope and substance satisfactory to Lender. On and after
the Final Equipment Loan Conversion Date, Borrower shall have no ability to
request, and Lender shall have no obligation to make, any further Final
Equipment Loans.
ARTICLE VII. Interest, Prepayment, Etc.
Section 7.1. Interest.
(a) Pre-default Interest. So long as no Defaulting Event has occurred:
(i) Revolving Loans. Each Revolving Loan shall bear such type of interest
as the Borrower may elect subject to the provisions of this Agreement. During
the period from the date made through and
<PAGE>
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including the date of payment in full, each Revolving Loan shall bear interest
on the outstanding principal amount thereof, for the Interest Period applicable
thereto, at the election of the Borrower, (A) in the case of a Prime Rate Loan,
at a floating rate per annum equal to the Prime Rate plus three-quarters of one
percentage point (.75%), or (B) in the case of a LIBOR Rate Loan, at a per annum
rate equal to the LIBOR Rate plus three hundred (300) basis points.
(ii) Term Loan. The Term Loan shall bear such type of interest as the
Borrower may elect subject to the provisions of this Agreement. The Term Loan
shall bear interest on the outstanding principal amount thereof, for the
Interest Period applicable thereto, at a per annum rate equal to, at the
election of the Borrower: (A) if a Prime Rate Loan, at a floating rate per
annum equal to the Prime Rate plus three-quarters of one percentage point
(.75%), or (B) in the case of a Fixed Rate Loan, at a per annum rate equal to
the Fixed Rate plus three hundred twenty-five (325) basis points.
(iii) Initial Equipment Loans. Each Initial Equipment Loan shall bear such
type of interest as the Borrower may elect subject to the provisions of this
Agreement. During the period from the date made until the Initial Equipment
Loan Conversion Date, each Initial Equipment Loan shall bear interest on the
outstanding principal amount thereof, for the Interest Period applicable
thereto, at the election of the Borrower, (A) in the case of a Prime Rate
Loan, at a floating rate per annum equal to the Prime Rate plus
three-quarters of one percentage point (.75%), or (B) in the case of a LIBOR
Rate Loan, at a per annum rate equal to the LIBOR Rate plus three hundred
(300) basis points.
(iv) Initial Converted Equipment Loan. The Initial Converted Equipment
Loan shall bear such type of interest as the Borrower may elect subject to
the provisions of this Agreement. During the period from the Initial
Equipment Loan Conversion Date through and including the date of payment in
full, the Initial Converted Equipment Loan shall bear interest on the
outstanding principal amount thereof, for the Interest Period applicable
thereto, at the election of the Borrower, (A) in the case of a Prime Rate
Loan, at a floating rate per annum equal to the Prime Rate plus
three-quarters of one percentage point (.75%), or (B) in the case of a Fixed
Rate Loan, at a per annum rate equal to the Fixed Rate plus three hundred
twenty-five (325) basis points.
(v) Subsequent Equipment Loans. Each Subsequent Equipment Loan shall bear
such type of interest as the Borrower may elect subject to the provisions of
this Agreement. During the period from the date made until the Subsequent
Equipment Loan Conversion Date,
<PAGE>
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each Subsequent Equipment Loan shall bear interest on the outstanding principal
amount thereof, for the Interest Period applicable thereto, at the election of
the Borrower, (A) in the case of a Prime Rate Loan, at a floating rate per annum
equal to the Prime Rate plus three-quarters of one percentage point (.75%), or
(B) in the case of a LIBOR Rate Loan, at a per annum rate equal to the LIBOR
Rate plus three hundred (300) basis points.
(vi) Subsequent Converted Equipment Loan. The Subsequent Converted
Equipment Loan shall bear such type of interest as the Borrower may elect
subject to the provisions of this Agreement. During the period from the
Subsequent Equipment Loan Conversion Date through and including the date of
payment in full, the Subsequent Converted Equipment Loan shall bear interest
on the outstanding principal amount thereof, for the Interest Period
applicable thereto, at the election of the Borrower, (A) in the case of a
Prime Rate Loan, at a floating rate per annum equal to the Prime Rate plus
three-quarters of one percentage point (.75%), or (B) in the case of a Fixed
Rate Loan, at a per annum rate equal to the Fixed Rate plus three hundred
twenty-five (325) basis points.
(vii) Final Equipment Loans. Each Final Equipment Loan shall bear such
type of interest as the Borrower may elect subject to the provisions of this
Agreement. During the period from the date made until the Final Equipment
Loan Maturity Date, each Final Equipment Loan shall bear interest on the
outstanding principal amount thereof, for the Interest Period applicable
thereto, at the election of the Borrower, (A) in the case of a Prime Rate
Loan, at a floating rate per annum equal to the Prime Rate plus
three-quarters of one percentage point (.75%), or (B) in the case of a LIBOR
Rate Loan, at a per annum rate equal to the LIBOR Rate plus three hundred
(300) basis points.
(viii) Final Converted Equipment Loans. The Final Converted Equipment Loan
shall bear such type of interest as the Borrower may elect subject to the
provisions of this Agreement. During the period from the Final Equipment Loan
Conversion Date through and including the date of payment in full, the Final
Converted Equipment Loan shall bear interest on the outstanding principal
amount thereof, for the Interest Period applicable thereto, at the election
of the Borrower, (A) in the case of a Prime Rate Loan, at a floating rate per
annum equal to the Prime Rate plus three-quarters of one percentage point
(.75%), or (B) in the case of a Fixed Rate Loan, at a per annum rate equal to
the Fixed Rate plus three hundred twenty-five (325) basis points.
<PAGE>
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(b) Payment of Interest. So long as any of the Obligations remain
outstanding, interest on the Loans shall be due and payable without notice or
demand monthly in arrears beginning on August 1, 1998 and continuing on the
first business day of each and every month thereafter.
(c) Default Interest Rate. Notwithstanding the foregoing, interest on the
Loans, at all times after the occurrence of an Event of Default and during the
continuance of an Event of Default, and interest on all payments of interest
that are not paid when due, shall accrue at a rate per annum equal to, in the
case of any Event Default which occurs as a result of Borrower's failure to make
any payment required hereunder or under the Notes, four percentage points
(4.0%), and in the case of any other Event of Default, two percentage points
(2.0%), in each case above the applicable interest rates otherwise in effect
under this Agreement.
(d) Calculation Of Interest. Interest on the Loans shall be calculated on the
basis of a 360-day year and the actual number of days elapsed.
(e) Late Payment. If any amount due hereunder or under the Notes is not paid
within ten (10) days after the date it is due and payable, without in any way
affecting Lender's right to make demand hereunder or to declare an Event of
Default to have occurred, Lender may in its sole discretion assess a late charge
against Borrower equal to five percent (5.0%) of such late payment (provided,
however, that the minimum late charge assessed by Lender hereunder shall be
$15.00), which late charge shall be immediately due and payable and may be paid
by a charge to, at Lender's option, either Borrower's Revolving Loan Account or
Equipment Loan Account.
(f) Lawful Interest. It being the intent of the parties that the rate of
interest and all other charges to Borrower be lawful, if for any reason the
payment of a portion of interest, fees or charges as required by this Agreement
would exceed the limit established by applicable law which a commercial bank
such as Lender may charge to a commercial borrower such as Borrower, then the
obligation to pay interest or charges shall automatically be reduced to such
limit and, if any amounts in excess of such limits shall have been paid, then
such amounts shall be applied to the unpaid principal amount of the Obligations
or refunded to Borrower so that under no circumstances shall interest or charges
required hereunder exceed the maximum rate allowed by law, as aforesaid.
Section 7.2. Conversion of Interests Rates of Revolving Loans, Equipment
Loans and Term Loan.
(a) Revolving Loans. Provided that no Event of Default shall have occurred,
the Borrower may, on any Business Day, convert any outstanding Prime Rate Loan
or a LIBOR Rate Loan into a LIBOR Rate Loan or a Prime Rate Loan, respectively,
in the same aggregate principal amount, provided,
<PAGE>
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however, that any conversion of a LIBOR Rate Loan shall be made only on the last
Business Day of the then current Interest Period applicable to such LIBOR Rate
Loan.
(b) Initial Equipment Loans Prior to Initial Equipment Loan Conversion Date.
Provided that no Event of Default shall have occurred, the Borrower may, on any
Business Day prior to the Initial Equipment Loan Conversion Date, convert any
outstanding Initial Equipment Loan bearing interest as a Prime Rate Loan or a
LIBOR Rate Loan into a LIBOR Rate Loan or a Prime Rate Loan, respectively, in
the same aggregate principal amount, provided, however, that any conversion of a
LIBOR Rate Loan shall be made only on the last Business Day of the then current
Interest Period applicable to such LIBOR Rate Loan.
(c) Initial Equipment Loans After Initial Equipment Loan Conversion Date.
Provided no Event of Default shall have occurred, the Borrower may, on any
Business Day after the Initial Equipment Loan Conversion Date, convert the
outstanding Initial Converted Equipment Loan bearing interest as a Prime Rate
Loan or a Fixed Rate Loan into a Fixed Rate Loan or a Prime Rate Loan,
respectively, in the same aggregate principal amount, provided, however, that
any conversion of a Fixed Rate Loan shall be made only on the last Business Day
of the then current Interest Period applicable to such Fixed Rate Loan.
(d) Subsequent Equipment Loans Prior to Subsequent Equipment Loan Conversion
Date. Provided that no Event of Default shall have occurred, the Borrower may,
on any Business Day prior to the Subsequent Equipment Loan Conversion Date,
convert any outstanding Subsequent Equipment Loan bearing interest as a Prime
Rate Loan or a LIBOR Rate Loan into a LIBOR Rate Loan or a Prime Rate Loan,
respectively, in the same aggregate principal amount, provided, however, that
any conversion of a LIBOR Rate Loan shall be made only on the last Business Day
of the then current Interest Period applicable to such LIBOR Rate Loan.
(e) Subsequent Equipment Loans After Subsequent Equipment Loan Conversion
Date. Provided no Event of Default shall have occurred, the Borrower may, on any
Business Day after the Subsequent Equipment Loan Conversion Date, convert the
outstanding Subsequent Converted Equipment Loan bearing interest as a Prime Rate
Loan or a Fixed Rate Loan into a Fixed Rate Loan or a Prime Rate Loan,
respectively, in the same aggregate principal amount, provided, however, that
any conversion of a Fixed Rate Loan shall be made only on the last Business Day
of the then current Interest Period applicable to such Fixed Rate Loan.
<PAGE>
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(f) Final Equipment Loans Prior to Final Equipment Loan Conversion Date.
Provided that no Event of Default shall have occurred, the Borrower may, on any
Business Day prior to the Final Equipment Loan Conversion Date, convert any
outstanding Final Equipment Loan bearing interest as a Prime Rate Loan or a
LIBOR Rate Loan into a LIBOR Rate Loan or a Prime Rate Loan, respectively, in
the same aggregate principal amount, provided, however, that any conversion of a
LIBOR Rate Loan shall be made only on the last Business Day of the then current
Interest Period applicable to such LIBOR Rate Loan.
(g) Final Equipment Loans After Final Equipment Loan Conversion Date.
Provided no Event of Default shall have occurred, the Borrower may, on any
Business Day after the Final Equipment Loan Conversion Date, convert the
outstanding Final Converted Equipment Loan bearing interest as a Prime Rate Loan
or a Fixed Rate Loan into a Fixed Rate Loan or a Prime Rate Loan, respectively,
in the same aggregate principal amount, provided, however, that any conversion
of a Fixed Rate Loan shall be made only on the last Business Day of the then
current Interest Period applicable to such Fixed Rate Loan.
(h) Term Loan. Provided that no Event of Default shall have occurred, the
Borrower may, on any Business Day, convert the outstanding Term Loan bearing
interest as a Prime Rate Loan or a Fixed Rate Loan into a Fixed Rate Loan or a
Prime Rate Loan, respectively, in the same aggregate principal amount, provided,
however, that any conversion of a Fixed Rate Loan shall be made only on the last
Business Day of the then current Interest Period applicable to such Fixed Rate
Loan.
(i) Conversion of Loans. If the Borrower desires to convert a Loan, it shall
give Lender not less than three (3) Business Days' prior written notice
specifying the date of such conversion, the Loan to be converted, and if the
conversion is from a Prime Rate Loan to a LIBOR Rate Loan, or from a Prime Rate
Loan to a Fixed Rate Loan, the duration of the first Interest Period therefor.
Section 7.3. Prepayments.
(a) Optional Prepayments. Borrower may, at its option and upon thirty (30)
Business Days prior written notice (except with respect to the Revolving Loan in
which case no prior written notice shall be required), prepay any Loan, in whole
or in part, on the following conditions: (a) Borrower shall pay all accrued
interest on the principal being paid to the date of the prepayment and, in the
case of prepayments in full, all fees, charges, costs, expenses and other
amounts then due under any of the Loans, (b) in the case of a LIBOR Rate Loan or
Fixed Rate Loan, such LIBOR Rate Loan or Fixed Rate
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Loan shall only be prepaid on the last Business Day of the then current Interest
Period with respect thereto; (c) any partial prepayment of the Term Loan or a
Converted Equipment Loan shall be applied to principal installments due
thereunder in the inverse order of maturity and shall not relieve Borrower's
obligation to make regularly scheduled principal payments thereunder; (d) if
Borrower wishes to prepay and terminate the Revolving Loans prior to the
expiration of the Revolving Loan Term, Borrower must, at the option of Lender,
also prepay in full the other Loans and all other Obligations, including without
limitation, any amount or amounts due under Article VIII hereof; and (e) in its
notice, the Borrower shall specify the date of prepayment, the type of loan to
be prepaid and the specific amount to be prepaid on such loan. In the event that
any prepayment of a LIBOR Rate Loan or Fixed Rate Loan is required or permitted
on a date other than the last Business Day of the then current Interest Period
with respect thereto, the Borrower shall indemnify the Lender therefor in
accordance with Section 8.4 hereof.
(b) Mandatory Prepayments.
(i) Revolving Loans. If, at any time, the aggregate principal amount
of all outstanding Revolving Loans shall exceed the Revolving Loan
Borrowing Base, then any such excess amount shall, without limiting any
other rights or remedies of Lender hereunder, be immediately paid by
Borrower to the Lender.
(ii) Equipment Loan. If, at any time, the aggregate principal amount
of all outstanding Equipment Loans shall exceed the Equipment Loan
Borrowing Base, then any such excess amount shall, without limiting any
other rights or remedies of Lender hereunder, be immediately paid by
Borrower to the Lender.
Section 7.4. Closing Fees. On or before the date hereof, Borrower shall pay
or have paid to Lender all fees, expenses and other costs incurred by Lender in
connection with the closing of the extension of the Loans (including, without
limitation, all attorney's and other professionals' fees and expenses).
Section 7.5. Commitment Fee. On or before the date hereof, Borrower shall pay
or have paid to Lender a non-refundable commitment fee of $25,000 in connection
with the closing of the Loans.
Section 7.6. Unused Revolving Loan Fee. The Borrower shall pay to Lender a
fee computed at the per annum rate of one-quarter of one percentage point (.25%)
on the average daily unused portion of the Revolving Loan during the period for
which payment is made, payable monthly in arrears commencing on August 1, 1998
and continuing on the first Business Day of
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each and every month thereafter and on the last day of the Revolving Loan Term
or such earlier date as the Revolving Loan shall terminate.
Section 7.7. Early Termination Fee. In the event that during the first year
of the Revolving Loan Term (a) the Revolving Loan is terminated by the Borrower,
or (b) the Revolving Loan is terminated as a result of the occurrence of an
Event of Default, Borrower shall pay to Lender on the effective date of
termination, in addition to any other payments Borrower is required to make
hereunder, a termination fee equal to one percent (1%) of the maximum principal
amount of the Loans (the "Termination Fee"). It is understood that the
determination of the maximum principal amount of the Loans shall be made without
regard to the components of the Revolving Loan Borrowing Base based upon
Eligible Accounts and Eligible Inventory and the component of the Equipment Loan
Borrowing Base based upon Eligible Equipment. For example, for purposes of this
provision, on the date hereof the maximum principal amount of the Revolving Loan
is $3,000,000, the maximum principal amount of the Equipment Loan is $750,000
and the maximum principal amount of the Term Loan is $500,000 and the
Termination Fee would be $42,500.
ARTICLE VIII. Yield Protection
Section 8.1. Increased Costs. In the event that applicable law, treaty or
regulation or directive from any government, governmental agency or regulatory
authority, or any change therein or in the interpretation or application
thereof, or compliance by Lender with any request or directive (whether or not
having the force of law) from any central bank or government, governmental
agency or regulatory authority, shall:
(a) subject Lender to any tax of any kind whatsoever with respect to this
Agreement or any of the Loans (except taxes on the overall net income of Lender)
or change the basis of taxation of payments to Lender of principal, interest or
any other amount payable hereunder (except for changes in the rate of tax on the
overall net income of Lender);
(b) impose, modify or hold applicable any reserve, special deposit or similar
requirements against assets held by, or deposits or other liabilities in or for
the account of, advances or loans by, or other credit extending by, any office
of Lender, including without limitation, pursuant to Regulations of the Board of
Governors of the Federal Reserve System; or
(c) in the reasonable opinion of Lender, cause any Note, any Loan or this
Agreement to be included in any calculations used in the computation of
regulatory capital standards; or
(d) impose on Lender any other condition with respect to this Agreement, any
of the Notes or any of the Loans;
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and the result of any of the foregoing is to increase the cost to Lender of
making, renewing or maintaining any of the Loans (or any part thereof) by an
amount the Lender deems to be material or to reduce the amount of any payment
(whether of principal, interest or otherwise) with respect to any of the Loans
by an amount that Lender deems to be material, then, in any such case, Borrower
shall promptly pay Lender, upon its demand, such additional amounts as will
compensate Lender for such additional costs or such reduction as the case may be
(collectively, the "Additional Costs"). Lender shall certify the amount of such
Additional Costs to Borrower, and such certification, absent manifest error,
shall be deemed conclusive.
Section 8.2. Capital Adequacy Protection. If, after the date hereof, Lender
shall have determined that the adoption of any applicable law, governmental
rule, regulation or order regarding capital adequacy of banks or bank holding
companies, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Lender with any request or directive regarding capital adequacy (whether or
not having the force of law and whether or not failure to comply therewith would
be unlawful, so long as Lender believes in good faith that such has the force of
law or that the failure to so comply would be unlawful) of any such authority,
central bank or comparable agency, has or would have the effect of reducing the
rate of return on Lender's capital as a consequence of Lender's obligations
hereunder to a level below that which Lender could have achieved but for such
adoption, change or compliance (taking into consideration Lender's policies with
respect to capital adequacy immediately before such adoption, change or
compliance and assuming that Lender's capital was fully utilized prior to such
adoption, change or compliance) by an amount deemed by Lender in its reasonable
judgment to be material, then, upon demand, Borrower shall immediately pay to
Lender, from time to time as specified by Lender, such additional amounts as
shall be sufficient to compensate Lender of such reduced return, together with
interest on each such amount from the date of such specification by Lender until
payment in full thereof at the highest rate of interest (other than the default
rate of interest) due on the Loans. A certificate of Lender setting forth the
amount to be paid to Lender shall, in the absence of manifest error, be deemed
conclusive. In determining such amount, Lender shall use any reasonable
averaging and attribution methods. Borrower may, however, avoid paying such
amounts for future rate of return reductions if, within the maximum borrowings
permitted herein, Borrower borrows such amounts as will cause Lender to avoid
any such future rate of return reductions which would otherwise be caused by
such changed capital adequacy requirements or Borrower agrees to a reduction in
the Loans to achieve the same result.
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Section 8.3. Basis for Determining Interest Rate Inadequate or Unfair. In the
event that the Lender shall have determined that (a) by reason of circumstances
affecting the Interbank LIBOR market, adequate and reasonable means do not exist
for determining LIBOR, or (b) Dollar deposits in the relevant amount and for the
relevant maturity are not available to the Lender in the Interbank LIBOR market
with respect to a proposed LIBOR Rate Loan, a proposed conversion of any Prime
Rate Loan to a LIBOR Rate Loan, or an outstanding LIBOR Rate Loan, Lender shall
give the Borrower prompt notice of such determination. If such notice is given
(i) any requested LIBOR Rate Loan shall be made as a Prime Rate Loan, unless the
Borrower gives the Lender three (3) Business Days' prior written notice that its
request for such borrowing is cancelled; (ii) any loan which was to have been
converted to a LIBOR Rate Loan shall be continued as a Prime Rate Loan; and
(iii) any outstanding LIBOR Rate Loan shall be converted to a Prime Rate Loan on
the last Business Day of the then current Interest Period for such LIBOR Rate
Loan. Until such notice has been withdrawn, the Lender shall have no obligation
to make LIBOR Rate Loans or maintain outstanding LIBOR Rate Loans, and the
Borrower shall not have the right to convert Prime Rate Loans to LIBOR Rate
Loans.
Section 8.4. Indemnity. The Borrower agrees to indemnify the Lender and to
hold the Lender harmless from any loss (including the additional costs referred
to in Section 8.1 above and any lost profits) or expense that it may sustain or
incur as a consequence of any prepayment or any Event of Default by the Borrower
in the payment of the principal of or interest on any LIBOR Rate Loan or Fixed
Rate Loan or as a consequence of a failure by the Borrower to complete a
borrowing of, a prepayment of or conversion of a LIBOR Rate Loan or Fixed Rate
Loan after notice thereof has been given, including (but not limited to) any
loss of profit or any interest payable by the Lender to lenders of funds
obtained by it in order to make or maintain its LIBOR Rate Loans or Fixed Rate
Loans hereunder (including, in the case of any Fixed Rate Loan, the Fixed Rate
Prepayment Premium).
Section 8.5. Survival. Unless and only if Lender shall have made prompt
demand upon Borrower for payment of amounts due under this Article VIII prior to
the date upon which full and final payment of the Revolving Loans and other
Obligations is made, the obligations and covenants of Borrower under this
Article VIII shall survive the termination of this Agreement and payment of the
Loans and other Obligations.
ARTICLE IX. Representations and Warranties
Section 9.1. Representations and Warranties. Borrower represents and warrants
to Lender that:
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(a) Good Standing and Qualification. It is duly organized, validly existing
and in good standing under the laws of the State of Delaware. It has all
requisite corporate power and authority to own and operate its properties and to
carry on its business as presently conducted and is duly qualified to do
business and is in good standing as a foreign corporation in each jurisdiction
wherein the character of the properties owned or leased by it therein or in
which the transaction of its business therein makes such qualification
necessary, except where such failure to be so qualified would not have a
material adverse effect on the financial condition, assets or operations of the
Borrower.
(b) Corporate Authority. It has full power and authority to enter into this
Agreement and the other Financing Agreements to which it is a party, to make the
borrowings contemplated herein, to execute and deliver the Notes and the other
Financing Agreements to which it is a party, and to incur the obligations
provided for herein and therein, all of which have been duly authorized by all
necessary and proper corporate action. No other consent or approval or the
taking of any other action in respect of shareholders or of any public authority
is required as a condition to the validity or enforceability of this Agreement,
the Notes, the other Financing Agreements or any other instrument, document or
agreement delivered in connection herewith or therewith.
(c) Binding Agreements. This Agreement constitutes, and the Notes and the
other Financing Agreements executed and/or delivered in connection herewith or
therewith, when issued and delivered pursuant hereto for value received shall
constitute, valid and legally binding obligations of Borrower, enforceable in
accordance with their respective terms, except as enforcement may be limited by
principles of equity, bankruptcy, insolvency, or other laws affecting the
enforcement of creditors' rights generally.
(d) Litigation. Except as set forth on Schedule 9.1(d) attached hereto, (i)
there are no actions, suits or proceedings pending against Borrower before any
court or administrative agency, nor are there any (ii) actions, suits or
proceedings threatened, which, with respect to both (i) and (ii) individually or
in the aggregate, would materially and adversely affect the financial condition,
assets or operations of Borrower, nor are there any such actions, suits or
proceedings which question the validity of this Agreement, the Notes, any of the
other Financing Agreements or any action to be taken in connection with the
transactions contemplated hereby or thereby.
(e) No Conflicting Law or Agreements. The execution, delivery and performance
by Borrower of this Agreement, the Notes and each other Financing Agreement, as
the case may be, does not (i) violate any provision of its Certificate of
Incorporation or By-laws or any order, decree or judgment, or any material
provision of any statute, rule or regulation to which
<PAGE>
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the Borrower may be subject; (ii) violate or conflict with, result in a breach
of or constitute (with notice or lapse of time, or both) a material default
under any shareholder agreement, stock preference agreement, mortgage, indenture
or other contract or undertaking to which it is a party, or by which any of its
properties may be bound; and (iii) result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any property or assets
of Borrower, except for the liens granted hereunder to Lender.
(f) Taxes. With respect to all of its taxable periods it has filed all tax
returns which are required to be filed and all federal, state, municipal,
franchise and other taxes shown on such filed returns have been paid or are
being diligently contested by appropriate proceedings and have been reserved
against, as required by generally accepted accounting principles, consistently
applied.
(g) Financial Statements. It has heretofore delivered to Lender its audited
annual balance sheet as of June 30, 1997, and the related statements of income,
retained earnings and cash flows for the fiscal year or period then ended. Each
of such statements is complete and correct in all material respects and fairly
presents its consolidated financial condition as of the dates and for the
periods referred to therein and has been prepared in accordance with generally
accepted accounting principles. There are no liabilities, direct or indirect,
fixed or contingent, of Borrower as of the dates of said balance sheets which
are not reflected in such statements or in the notes thereto, except as are not
required to be so reflected in accordance with GAAP.
(h) Adverse Developments. Except as set forth on Schedule 9.1(h) attached
hereto, since its unaudited balance sheet as of March 31, 1998, there has been
no material adverse change in its financial condition, business, operations,
affairs or prospects or in any of its properties or assets.
(i) Existence of Assets and Title Thereto. Except as set forth on Schedule
9.1(i) attached hereto, it has good and marketable title to all of its
properties and assets, including the properties and assets reflected in the
financial statements delivered in connection herewith. None of such properties
or assets are subject to any mortgage, pledge, lien, lease, encumbrance or
charge, except those permitted under the terms of this Agreement, pledges or
deposits in connection with or to secure workers' compensation, unemployment or
liability insurance, liens for property taxes not yet due and payable, and other
similar liens arising by operation of law and not in the aggregate material.
(j) Regulations G, T, U and X. The proceeds of the borrowings hereunder are
not being used and will not be used, directly or indirectly, for the purposes of
purchasing or carrying any margin stock in contravention, or which
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would cause any Lender to be in violation, of Regulations G, T, U or X
promulgated by the Board of Governors of the Federal Reserve System.
(k) Compliance. Except as set forth on Schedule 9.1(k) attached hereto, it is
not in default with respect to any order, writ, injunction or decree of any
court or of any federal, state, municipal or other governmental department,
commission, board, bureau, agency, authority or official, nor is it in violation
of any material law, statute, rule or regulation to which it is or any of its
properties are subject and it has not received notice of any such default from
any party and is not in default in the payment or performance of any of its
material obligations to any third parties or in the performance of any material
mortgage, indenture, lease, contract or other agreement to which it is a party
or by which any of its assets or properties may be bound.
(l) Leases and Subleases. It enjoys quiet and undisturbed possession under
all leases and subleases under which it is operating, and all of such leases and
subleases are valid and subsisting and not in default.
(m) Pension Plans.
(i) No fact, including but not limited to any "reportable event", as that
term is defined in Section 4043 of ERISA, exists in connection with any Plan
of any of the Companies under Sections 414(b), (c), (m), (n) and (o) of the
Internal Revenue Code of 1986, as amended (the "Code") which might constitute
grounds for termination of any such Plan by the Pension Benefit Guaranty
Corporation (the "PBGC") or for the appointment by the appropriate United
States District Court of a trustee to administer any such Plan. A list of all
of the Companies' respective Plans are attached hereto on Schedule 9.1(m)
attached hereto;
(ii) No "prohibited transaction" within the meaning of Section 406 of
ERISA or Section 4975 of the Code exists or will exist upon the execution and
delivery of this Agreement and the other Financing Agreements, or the
performance by the parties hereto or thereto of their respective duties and
obligations hereunder and thereunder;
(iii) Each of the Companies agrees to do all acts, including, but not
limited to, making all contributions necessary to maintain compliance with
ERISA or the Code, and agrees not to terminate any such Plan in a manner (or
do or fail to do any act) which could result in the imposition of a lien on
any of its properties pursuant to Section 4068 of ERISA;
(iv) None of the Companies sponsors or maintains, and has never
contributed to, and has not incurred any withdrawal liability under a
"multi-employer plan" as defined in Section 3 of ERISA and none of
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the Companies has any written or verbal commitment of any kind to establish,
maintain or contribute to any "multi-employer plan" under the Multi-employer
Pension Plan Amendment Act of 1980;
(v) None of the Companies has any unfunded liability in contravention of
ERISA and the Code;
(vi) Each and every Plan complies currently, and has complied in the past,
both as to form and operation, with its terms and with provisions of the Code
and ERISA, and all applicable regulations thereunder and all rules issued by
the Internal Revenue Service U.S. Department of Labor and the PBGC and as
such, is and remains a "qualified" plan under the Code;
(vii) No actions, suits or claims are pending (other than routine claims
for benefits) against any Plan, or the assets of any such Plan;
(viii) The Companies have performed all obligations required to be
performed by it under any Plan and the Companies are not in default, or in
violation of any Plan, and have no knowledge of any such default or violation
by any other party to any and all Plans;
(ix) No liability has been incurred by any of the Companies to the PBGC or
to participants or beneficiaries on account of any termination of a Plan
subject to Title IV of ERISA, no notice of intent to terminate a Plan has
been filed by (or on behalf of) any of the Companies pursuant to Section 4041
of ERISA and no proceeding has been commenced by the PBGC pursuant to Section
4042 of ERISA;
(x) The reporting and disclosure provisions of the Securities Act of 1933
and Securities Exchange Act of 1934 have been complied with for all such
Plans.
(n) Deferred Compensation Arrangements. Except as set forth in Schedule
9.1(n) attached hereto, none of the Companies have entered into deferred
compensation plans, arrangements or commitments (each, individually an
"Arrangement"). With respect to each such Arrangement:
(i) Such Arrangement complies currently, and has complied in the past,
both as to form and operation, with its terms and the provisions of the Code
and ERISA and all applicable laws, rules and regulations;
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(ii) The disclosure and reporting provisions of the Securities Act of 1933
and the Securities Exchange Act of 1934 have been satisfied;
(iii) Such Arrangement is legally valid and binding and is in full force
and effect;
(iv) The Companies have made all contributions required to be made under
such Arrangement and no contributions are currently due and owing thereunder;
(v) There are no actions, suits or claims pending (other than routine
claims for benefits) or, to the best of the Companies' knowledge, which could
be reasonably expected to be asserted against such Arrangement; and
(vi) The Companies have performed all obligations required to be performed
by it under such Arrangement and the Companies are not in default or in
violation of, and the Companies have no knowledge of a such default or
violation by any other party to such Arrangement.
Notwithstanding anything to the contrary contained herein, the
representations and warranties contained in this Section 9.1(n) are qualified in
their entirety by the disclosure set forth in Schedule 9.1(n) attached hereto.
(o) Chief Executive Office. Its chief executive office and principal place of
business, and the office where its books and records concerning Collateral are
kept, is as set forth in the first paragraph of this Agreement and in Schedule
9.1(o) attached hereto.
(p) Places of Business. It has no other places of business and locates no
Collateral, specifically including books and records, at any location other than
as set forth in Schedule 9.1(o) attached hereto. It shall maintain a full and
complete set of its books and records in its offices at the chief executive
office described in the immediately preceding paragraph.
(q) Contingent Liabilities. It is not a party to any suretyship, guaranty or
other similar type agreement, nor has it offered its endorsement to any
individual, concern, corporation or other entity or acted or failed to act in
any manner which would in any way create a contingent liability that does not
appear in the financial statements referred to hereinbefore.
(r) Contracts. After giving effect to the transactions contemplated upon the
closing of this Agreement, no material contract, governmental or otherwise, to
which it will be a party is subject to
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renegotiation, nor will it be in default of any material contract to which it is
a party.
(s) Unions and Pensions. It is not a party to any collective bargaining or
union agreement.
(t) Licenses. It has or, with respect to the conduct of its business in
California, has applied and reasonably expects to be granted, all material
licenses, permits and other permissions required by any government, agency or
subdivision thereof, or from any licensing entity to which Borrower may be
subject, necessary for the conduct of its business, all of which it represents
to be in good standing and in full force and effect.
(u) Collateral. After giving effect to the transactions contemplated upon the
closing of this Agreement, it will be the sole owner of the Collateral free and
clear of all liens, encumbrances, security interests and claims except the liens
granted to Lender hereunder and the security interests and liens listed on
Schedule 9.1(u) attached hereto. Borrower is fully authorized to grant a
security interest in each and every item of the Collateral to Lender. All
documents and agreements related to the Collateral shall be true and correct and
in all respects what they purport to be. All signatures and endorsements that
appear thereon shall be genuine and all signatories and endorsers shall have
full capacity to contract. None of the transactions underlying or giving rise to
the Collateral shall violate any applicable state or federal laws or
regulations. All documents relating to the Collateral shall be legally
sufficient under such laws or regulations and shall be legally enforceable in
accordance with their terms. Borrower agrees to defend the Collateral against
the claims of all persons other than Lender. Notwithstanding anything to the
contrary contained herein, the representations and warranties contained in this
Section 9.1(u) are qualified in their entirety by the disclosure set forth in
Schedule 9.1(u) attached hereto.
(v) Tradenames. It does not have any material tradenames other than as set
forth in Schedule 9.1(v) attached hereto.
(w) Financial Information. All financial information, including, but not
limited to information relating to the Receivables and Inventory, submitted by
it to Lender, whether previously or in the future, is and will be true and
correct in all material respects, and is and will be complete insofar as may be
necessary to render it a true and accurate depiction of the subject matter to
which it relates.
(x) Parent or Subsidiary Corporations. Borrower has no parent corporation and
has no Subsidiaries other than as set forth in Schedule 9.1(x) attached hereto.
<PAGE>
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(y) Environmental Matters.
(i) It has obtained all permits, licenses and other authorizations which
are required under all Environmental Laws. It is in compliance with the terms
and conditions of all such permits, licenses and authorizations, and is also
in compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and timetables
contained in any applicable Environmental Law or in any regulation, code,
plan, order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved thereunder.
(ii) No notice, notification, demand, request for information, citation,
summons or order has been issued, no complaint has been filed, no penalty has
been assessed and no investigation or review is pending or threatened by any
governmental or other entity with respect to any alleged failure by Borrower
to have any permit, license or authorization required in connection with the
conduct of its business or with respect to any Environmental Laws, including
without limitation, Environmental Laws relating to the generation, treatment,
storage, recycling, transportation, disposal or release of any Hazardous
Materials.
(iii) No oral or written notification of a release of any Hazardous
Material has been filed by or against Borrower and no property now or
previously owned, leased or used by it, including without limitation, the
Premises, is listed or proposed for listing on the Comprehensive
Environmental Response, Compensation and Inventory of Sites or National
Priorities List under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or on any similar state or federal
list of sites requiring investigation or cleanup.
(iv) There are no liens or encumbrances arising under or pursuant to any
Environmental Laws on any of the property or properties owned, leased or used
by it, including without limitation, any of the properties owned or leased by
it, and no governmental actions have been taken or are in process which could
subject any of such properties to such liens or encumbrances or, as a result
of which Borrower would be required to place any notice or restriction
relating to the presence of Hazardous Materials at any property owned by it
in any deed to such property.
(v) Neither it nor, to the best knowledge of Borrower, any previous owner,
tenant, occupant or user of any property owned, leased or used by Borrower,
has (i) engaged in or permitted any operations or activities upon or any use
or occupancy of such property, or any portion thereof, for the purpose of or
in any way involving the release, discharge,
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refining, dumping or disposal (whether legal or illegal, accidental or
intentional) of any Hazardous Materials on, under, or in or about such
property, or (ii) transported or had transported any Hazardous Materials to
such property except to the extent such Hazardous Materials are raw products
commonly used in day-to-day manufacturing operations of such property and, in
such case, in compliance with, all Environmental Laws; (iii) engaged in or
permitted any operations or activities which would allow the facility to be
considered a treatment, storage or disposal facility as that term is defined
in 40 CFR 264 and 265, (iv) engaged in or permitted any operations or
activities which would cause any of Borrower's properties to become subject
to The Connecticut Transfer Act. Section 22a-134 et sea. C.G.S., or (v)
constructed, stored or otherwise located Hazardous Materials on under, in or
about any such property except to the extent commonly used in day-to-day
operations of any such property and, in such case, in compliance with all
Environmental Laws. Further, to the best knowledge of Borrower, no Hazardous
Materials have migrated from other properties upon, about or beneath any such
property.
(z) Use of Proceeds. It will use the proceeds of the Loans solely (i) to
satisfy in full debt outstanding to First Union National Bank on the date
hereof, (ii) to satisfy in full debt outstanding to Emitzel Holdings, S.A. on
the date hereof and, to the extent not satisfied in full prior to the date
hereof, debt outstanding to James G. Binch and Harbour Investment Corporation on
the date hereof, and (iii) for working capital purposes.
ARTICLE X. Conditions of Lending
Section 10.1. Conditions of the Initial Loan. Subject to the terms hereof,
the obligation of Lender to make the first Initial Revolving Loan, the first
Initial Equipment Loan and the Term Loan under this Agreement is subject to the
fulfillment of the following conditions precedent at the time of the execution
of this Agreement:
(a) Notes. Lender shall have received a duly executed Revolving Loan Note,
Term Loan Note and Equipment Loan Note drawn to its order.
(b) Evidence of Corporate Action. Lender shall have received certified copies
of all corporate action (in form and substance satisfactory to Lender) taken by
Borrower to authorize the execution, delivery and performance of this Agreement,
the Notes, and the other Financing Agreements to which it is a party, and the
borrowings to be made hereunder and thereunder, together with true copies of
Borrower's Certificate of Incorporation and By-laws and such other papers as
Lender or its counsel may require.
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(c) Opinion of Counsel. Lender shall have received a favorable written
opinion of counsel for Borrower, accompanied by such supporting documents as
Lender or its counsel may require.
(d) Life Insurance Assignment. Lender shall have received a duly executed
life insurance assignment as collateral (the "Life Insurance Assignment") on the
life of James G. Binch, which shall be in an amount equal to $500,000. The Life
Insurance Assignment shall be in form, scope and substance satisfactory to
Lender.
(e) Lessor's Agreements. Borrower shall cause to be delivered to Lender
lessor's agreements with respect to the Premises leased or subleased by Borrower
(the "Lessor's Agreements") in form, scope and substance satisfactory to Lender.
(f) UCC-1 Financing Statements. Lender shall have received from Borrower duly
executed UCC-1 financing statements and such other documents as Lender deems
necessary or proper to perfect, upon filing of such UCC-1 financing statements
or such other documents, the security interest in the Collateral, all of which
shall be in form, scope and substance satisfactory to Lender and its counsel.
(g) Notices of Assignment and Post Office Box Change of Address Cards. Lender
shall have received notices of assignment and a post office change of address
cards from Borrower, which shall be in form, scope and substance satisfactory to
Lender and its counsel.
(h) CII Agreement. Lender shall have received an agreement from Connecticut
Innovations, Inc., in form, scope and substance satisfactory to Lender (the "CII
Agreement").
(i) Patent Security Agreement. Lender shall have received a Patent Security
Agreement, in form, scope and substance satisfactory to Lender (the "Patent
Security Agreement").
(j) Trademark Security Agreement. Lender shall have received a Trademark
Security Agreement, in form, scope and substance satisfactory to Lender (the
"Trademark Security Agreement").
(k) Lockbox Agreement. Lender shall have received a Lockbox Agreement, in
form, scope and substance satisfactory to Lender (the "Lockbox Agreement").
(l) Further Documents. Lender shall have received such further documents,
instruments and agreements as Lender may request, including without limitation,
title insurance or an attorneys' certificate of title,
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landlord's agreements, warehouse agreements, and evidence that the insurance
policies and certificates evidencing adequate insurance and coverage on
Borrower's assets are currently in full force and effect, continue to name
Lender as loss payee or additional insured, as the case may be, and that the
premiums are current.
Section 10.2. Conditions of Further Loans. In addition to the conditions in
Section 10.1 above, Lender shall make no further Revolving Loans or Equipment
Loans (collectively, the "Further Loans") unless the following conditions shall
exist or have been satisfied by Borrower at the time any Further Loan is
requested:
(a) Absence of Termination or Default. Lender shall not have terminated the
Revolving Loan facility or the Equipment Loan facility hereunder, nor shall a
Defaulting Event exist or have occurred.
(b) Compliance Certificates. On the date of each Revolving Loan or Equipment
Loan hereunder and after giving effect thereto, Borrower shall have delivered to
Lender, upon Lender's request, a certificate executed by its chief financial
officer which states, among other things, that: (i) Borrower has complied, and
is then in compliance, with all the terms, covenants and conditions of this
Agreement and the other Financing Agreements to which it is a party; (ii) there
exists no Event of Default or Defaulting Event; and (iii) the representations
and warranties contained herein and in the other Financing Agreements are true
and correct with the same effect as though such representations and warranties
had been made at the time of each Further Loan.
(c) Revolving Loan Borrowing Base and Equipment Loan Borrowing Base. The
indebtedness of Borrower by virtue of the making of any Revolving Loan or
Equipment Loan shall not exceed the Revolving Loan Borrowing Base or the
Equipment Loan Borrowing Base, respectively. Borrower shall not request any
Revolving Loan or Equipment Loan if the effect of such Revolving Loan or
Equipment Loan shall be to cause the aggregate balance of all Revolving Loans or
Equipment Loans to exceed the Revolving Loan Borrowing Base or the Equipment
Loan Borrowing Base, respectively.
(d) Further Documents. Lender shall have received such further documents,
instruments and agreements as Lender may reasonably request.
ARTICLE XI. Covenants
A. Affirmative Covenants.
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Borrower covenants and agrees that from the date hereof until payment and
performance in full of all Obligations, and until the termination of this
Agreement, unless Lender otherwise consents in writing, Borrower shall:
Section 11.1. Financial Statements. Deliver or caused to be delivered to
Lender: (a) within thirty (30) days after the close of each fiscal month of
Borrower, internally prepared financial statements of Borrower including balance
sheets as of the close of such month, and statements of income and retained
earnings for such month and for that portion of the fiscal year-to-date then
ended, all of which financial statements shall be prepared on a basis consistent
with that of the preceding period or containing disclosure of the effect on
financial condition or results of operations, and which shall be certified by
the chief financial officer of Borrower as being accurate and fairly presenting
the financial condition of Borrower; (b) within one hundred five (105) days
after the close of each fiscal year of Borrower, audited financial statements
including a balance sheet as of the close of such fiscal year and statements of
income, stockholders' capital and cash flow for the year then ended, both
prepared in conformity with generally accepted accounting principles, applied on
a basis consistent with that of the preceding year or containing disclosure of
the effect on financial condition or results of operations of any change in the
application of accounting principles during the year, and accompanied by a
report thereon containing an unqualified opinion of a recognized certified
public accounting firm selected by Borrower and reasonably satisfactory to
Lender (it being hereby agreed and understood that McGladrey & Pullen is an
accounting firm satisfactory to Lender), which opinion shall state that such
financial statements fairly present the financial condition and results of
operations of Borrower in accordance with generally accepted accounting
principles; (c) at least thirty (30) days prior to the close of each fiscal year
of Borrower, internally prepared drafts of annual projections of Borrower, in
form, scope and substance satisfactory to Lender; (d) within fifteen (15) days
of the close of each month, monthly aging of accounts receivable and accounts
payable, inventory status reports, ineligible calculations and reconciliations,
all in form, scope and substance satisfactory to Lender; (e) contemporaneously
with the delivery to shareholders or governmental agencies, copies of all
reports and information delivered to shareholders or filed with governmental
agencies, including without limitation, Forms 10-K and 10-Q; (f) promptly upon
Lender's written request, such other information about the financial condition
and operations of Borrower as Lender may, from time to time, reasonably request;
and (g) promptly upon becoming aware of any Event of Default, or the occurrence
or existence of a Defaulting Event, notice thereof in writing. Notwithstanding
anything to the contrary contained herein, the requirements herein with respect
to interim financial statements shall be subject to normal and customary
year-end audit adjustments and the fact that footnotes sufficient to satisfy the
requirements of the Securities and Exchange Act of 1934, as amended, need not be
as extensive as what may be required by generally accepted accounting
principles.
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Section 11.2. Insurance and Endorsements. (a) Keep its properties and cause
the Premises to be insured against fire and other hazards (pursuant to so-called
"All Risk" coverage) in amounts and with companies satisfactory to Lender to the
same extent and covering such risks as is customary in the same or a similar
business; maintain public liability coverage, including without limitation,
products liability coverage, against claims for personal injuries or death; and
maintain all worker's compensation, employment or similar insurance as may be
required by applicable law; and (b) all insurance shall contain such terms, be
in such form, and be for such periods reasonably satisfactory to Lender, and be
written by carriers duly licensed by the appropriate governmental authorities of
each state where any Collateral is located. Without limiting the generality of
the foregoing, such insurance must provide that it may not be canceled without
thirty (30) days' prior written notice to Lender. Borrower shall cause Lender to
be endorsed as a loss payee with a long form Lender's Loss Payable Clause, in
form and substance acceptable to Lender on all such insurance. In the event of
failure to provide and maintain insurance as herein provided, Lender may, at its
option, provide such insurance and charge the amount thereof to the Revolving
Loan Account. Borrower shall furnish to Lender certificates or other
satisfactory evidence of compliance with the foregoing insurance provisions.
Borrower hereby irrevocably appoints Lender as its attorney-in-fact, coupled
with an interest to make proofs of loss and claims for insurance, and to receive
payments of the insurance proceeds and execute and endorse all documents, checks
and drafts in connection with payment of such insurance. Any insurance proceeds
received by Lender shall be applied to the Obligations in such order and manner
as Lender shall determine in its sole discretion.
Section 11.3. Tax and Other Liens. Comply in all material respects with all
statutes and government regulations and pay all taxes, assessments, governmental
charges or levies, or claims for labor, supplies, rent and other obligations
made against it or their property which, if unpaid, might become a lien or
charge against Borrower or its properties, except for any of the foregoing being
contested in good faith and against which adequate reserves have been
established in accordance with generally accepted accounting principles.
Section 11.4. Place of Business; Locations of Collateral. Maintain its chief
place of business and chief executive offices at the address set forth in the
introductory sentence hereof and its other places of business as set forth in
Schedule 11.4 hereto unless Borrower shall have given Lender thirty (30) days'
prior written notice of each change in such place of business. Locate no
Collateral at any location other than the Premises; provided, however, that (a)
Borrower may locate inventory (other than work-in-process at customers'
premises) at locations other than the Premises which in the aggregate at any
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one time does not have a value of more than $100,000, and (b) Borrower may
locate work-in-process at customers' premises.
Section 11.5. Inspections. Allow Lender by or through any of its officers,
attorneys, and/or accountants designated by it, for the purpose of ascertaining
whether or not each and every provision hereof and of any related agreement,
instrument and document is being performed, to enter the offices and plants of
Borrower to examine or inspect any of the properties, books and records or
extracts therefrom, to make copies of such books and records or extracts
therefrom and to make complete environmental studies and/or investigations, and
to discuss the affairs, finances and accounts thereof with Borrower all at such
reasonable times, upon reasonable notice and as often as Lender or any
representative of Lender may reasonably request.
Section 11.6. Litigation. Promptly advise Lender of the commencement or
threat of litigation, including arbitration proceedings and any proceedings
before any governmental agency (but excluding product liability claims which are
either fully covered by insurance or adequately covered by insurance and which
are not likely to have a material adverse effect on the business, assets or
condition (financial or otherwise) of Borrower), which is instituted against
Borrower and is reasonably likely to have a materially adverse effect upon the
condition financial, operating or otherwise, of Borrower.
Section 11.7. Maintenance of Existence. Maintain its corporate existence and
comply with all valid and applicable statutes, rules and regulations, and
maintain its properties in good repair, working order and operating condition.
Borrower shall immediately notify Lender of any event causing material loss in
the value of their assets.
Section 11.8. Inventory. Allow Lender to examine and inspect the Inventory at
reasonable times and intervals and upon reasonable notice. Borrower shall
immediately notify Lender of any event causing material loss or depreciation in
value of Inventory and the amount of such loss or depreciation.
Section 11.9. ERISA. Immediately notify Lender of any event which causes it
not to be in compliance with ERISA in all material respects.
Section 11.10. Notice of Certain Events. Give prompt written notice to Lender
of:
(a) any material dispute that may arise between Borrower and any governmental
regulatory body or law enforcement agency;
(b) any labor controversy resulting or likely to result in a strike or work
stoppage against Borrower;
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(c) any proposal by any public authority to acquire the assets or business of
Borrower;
(d) the location of any Collateral other than at Borrower's places of
business disclosed in this Agreement (other than Collateral in transit in the
ordinary course of Borrower's business);
(e) any proposed or actual change of the name, identity or legal form of
organization of Borrower;
(f) any circumstance or event by virtue of which or in connection with which
Borrower may have incurred or may incur any liability, expense or responsibility
under any Environmental Law, including, without limitation: (i) any Release of
any Hazardous Material required to be reported to any federal, state or local
governmental authority instrumentality or agency under any applicable
Environmental Law; (ii) any and all written communications with respect to
claims or suits under any applicable Environmental Law or any Release of
Hazardous Material required to be reported to any federal, state or local
governmental authority, instrumentality or agency; (iii) any remedial action
taken by Borrower or any other person in response to (A) any Hazardous Material
on, under or about the properties or assets of Borrower, the existence of which
may give rise to a claim or suit resulting in a material change of Borrower's
business operations or financial condition, or (B) any claim or suit resulting
in a material change of Borrower's business operations or financial condition;
(iv) Borrower's discovery of any occurrence or condition on any real property
adjoining or in the vicinity of Borrower's business premises which may cause
such premises to be in violation of any Environmental Law or to be subject to
any restrictions on the ownership, occupation, transferability or use thereof
under any Environmental Law and (v) any request for information from any
federal, state or local governmental authority, instrumentality or agency that
indicates such entity is investigating Borrower's potential responsibility for a
Release of Hazardous Material;
(g) any other matter which has resulted or is reasonably likely to result in
a material adverse change in the financial condition or operations of Borrower;
(h) any information received by Borrower with respect to any Receivable that
may materially affect the value thereof or the rights and remedies of Lender
with respect thereto; and
(i) any action, suit or claim pending or which is threatened or asserted
against Borrower.
Section 11.11. Defaults. Upon the occurrence of an Event of Default or of a
Defaulting Event, give prompt written notice of such occurrence
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to Lender signed by the president or chief financial officer of Borrower
describing such occurrence and the action, if any, being taken to cure the Event
of Default or Defaulting Event.
Section 11.12. Duties. Borrower has complied and will continue to comply with
any and all material federal, state and local laws affecting its business,
including, but not limited to, payment of all federal and state taxes with
respect to sales to Account Debtors by Borrower and disclosures in connection
therewith. Borrower agrees to indemnify Lender against and hold Lender harmless
from, all claims, actions and losses, including reasonable attorney's fees and
costs incurred by Lender arising from any contention, whether well founded or
otherwise, that there has been a failure to comply with such laws.
Section 11.13. Collateral Duties. Do whatever Lender may reasonably request
from time to time by way of obtaining, executing, delivering and filing
financing statements, assignments, landlord's or mortgagee's waivers, warehouse
agreements and other notices and amendments and renewals of any of the
foregoing, and Borrower will take any and all reasonable steps and observe such
formalities as Lender may reasonably request, in order to create and maintain a
valid and enforceable first lien upon, pledge of, and first priority security
interest in, any and all of the Collateral. Lender hereby is authorized to file
financing statements without the signature of Borrower and to execute and file
such financing statements on behalf of Borrower as specified by the Uniform
Commercial Code to perfect or maintain its security interest in all of the
Collateral. All reasonable charges, expenses and fees Lender may incur in filing
any of the foregoing, together with reasonable costs and expenses of any lien
search required by Lender, and any taxes relating thereto, shall be charged to
the Revolving Loan Account and added to the Obligations.
Section 11.14. Audit and Appraisals by Lender; Fees. Permit Lender by or
through any of its officers, employees or other representatives to audit the
books and records of Borrower and to conduct or cause to be conducted appraisals
of Borrower's assets at such times, upon reasonable notice, and in such manner
and detail as Lender deems reasonable. Without limiting the generality of the
foregoing, Lender shall be allowed to verify the Receivables and Inventory of
Borrower and to confirm with Account Debtors the validity and amount of
Receivables. Lender is hereby authorized to charge any such audit and appraisal
fees and expenses to the Revolving Loan Account. Notwithstanding the foregoing,
so long as no Event of Default has occurred, Lender shall not conduct more than
two (2) audits or appraisals per calendar year and Borrower shall not be
obligated to reimburse or pay to Lender in excess of $15,000 per calendar year
in the aggregate for fees and expenses incurred in connection with any such
audit or appraisal.
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Section 11.15. Bank Accounts. Maintain all of its bank accounts, including
without limitation, its operating and depository accounts, at Lender; provided
however, the Borrower shall be permitted to have operating and depository
accounts not maintained by Lender so long as either (i) the aggregate amount on
deposit therein (not including for payroll) does not exceed $100,000 at any one
time and so long as it is necessary for Borrower to have such accounts because
Lender does not maintain a branch convenient to Borrower for the purposes of
such account or (ii) the Borrower has on deposit with Lender an aggregate amount
at least equal to the aggregate outstanding principal amount of the Loans.
Section 11.16. Year 2000 Compatibility. Borrower shall take all action
necessary to assure that Borrower's computer based systems are able to operate
and effectively process data including dates on and after January 1, 2000. At
the request of Lender, Borrower shall provide Lender with assurance acceptable
to Lender of Borrower's Year 2000 compatibility.
B. Negative Covenants.
The Borrower covenants and agrees that from the date hereof until payment and
performance in full of all Obligations and until the termination of this
Agreement, unless Lender otherwise consents in writing, the Borrower shall not:
Section 11.17. Encumbrances. Incur or permit to exist any lien, mortgage,
charge or other encumbrance against any of its properties or assets, whether now
owned or hereafter acquired, except: (a) liens required or expressly permitted
by this Agreement; (b) pledges or deposits in connection with or to secure
worker's compensation, unemployment or liability insurance; (c) those listed on
Schedule 9.1(u) attached hereto; and (d) purchase money liens securing financing
for machinery and equipment purchased in the ordinary course of business as
permitted pursuant to Section 11.18(b) below.
Section 11.18. Limitation on Indebtedness. Create, incur or guarantee any
indebtedness or obligation for borrowed money (including without limitation, any
reimbursement obligations for any letter of credit issued by any financial
institution) or issue or sell any of its obligations to any lender, except: (a)
as set forth on Schedule 11.18 attached hereto; and (b) purchase money financing
and/or capitalized lease obligations for machinery and equipment purchased or
leased in the ordinary course of business in the aggregate principal amount of
not greater than $350,000 in any fiscal year.
Section 11.19. Contingent Liabilities. Assume, guarantee, endorse or
otherwise become liable upon the obligations of any person, firm or corporation,
or enter into any purchase or option agreement or other arrangement having
substantially the same effect as such a guarantee, except
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by the endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business.
Section 11.20. Consolidation or Merger. Merge into or consolidate with or
into any entity.
Section 11.21. Loans, Advances, Investments. Except as set forth on Schedule
11.21 attached hereto, make or permit to exist any loans or advances to, or
purchase any stock, other securities or evidences of indebtedness of, or make or
permit to exist any investment (including without limitation the acquisition of
stock of a corporation), or acquire any assets or any other interest whatsoever,
in any other person; provided, however, that Borrower shall be permitted to make
investments in short-term direct obligations of the United States Government so
long as such obligations mature not more than one (1) year after the date of
acquisition thereof and that Lender continues to have a duly perfected first
lien security interest in such obligations in form, scope and substance
satisfactory to Lender; and provided further that the Borrower shall be
permitted to make loans to its officers, directors and shareholders in the
ordinary course of business in the aggregate principal amount of not greater
than $25,000 at any time, and advances for travel expenses incurred in the
ordinary course of Borrower's business. Lender acknowledges that Borrower has
advised it that Borrower may, in the future, desire to acquire interests in
other persons and, in connection with any such acquisition, Borrower may request
financing from Lender to fund any such acquisition. Lender agrees that it shall
not unreasonably withhold its consent to, and the use of Revolving Loan proceeds
for, any such investment or acquisition with respect to another person so long
as (a) at the time of any such investment or acquisition no Event of Default or
Defaulting Event shall have occurred or would occur after giving effect thereto
(including, without limitation, of any financial covenant set forth in Article
XIC below), and (b) the interests proposed to be acquired are with respect to an
industry which is similar, related or complementary to Borrower's industry.
Lender further agrees that it will consider any request from Borrower for
consent to, and financing for, any such investment or acquisition that does not
satisfy (a) or (b) above, it being agreed and understood that the granting of
any such consent or commitment to finance shall be in the sole discretion of
Lender.
Section 11.22. Acquisition of Stock of Borrower; Dividends. Except as may be
permitted pursuant to the terms of the CII Agreement, purchase, acquire, redeem
or retire, or make any commitment to purchase, acquire, redeem or retire, any of
the capital stock of Borrower, whether now or hereafter outstanding, or declare
or pay any dividend, or make any distribution to any of its stockholders.
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Section 11.23. Sale and Lease of Assets. Except as set forth on Schedule
11.23 attached hereto, sell or lease any of the assets of the Borrower, except
for sales of inventory in the ordinary course of business consistent with past
practices and on an arms-length basis and except for assets having a book value
of not more than $750,000 and used solely in a business operation of the
Borrower that the Borrower has elected to discontinue, provided that, Borrower
receives at least $500,000 for such assets, at least forty percent (40%) of
which is received in cash and no more than sixty percent (60%) of which is
received in the form of a promissory note which will be assigned to Lender
pursuant to documents in form, scope and substance satisfactory to Lender in its
sole discretion.
Section 11.24. Name Changes. Change its name from that set forth in this
Agreement.
Section 11.25. Prohibited Transfers. Transfer, in any manner, either directly
or indirectly, any cash, property, or other asset to any parent or any of its
affiliates or Subsidiaries, other than sales made in the ordinary course of
business and for fair consideration on terms no less favorable than if such sale
had been an arms-length transaction between Borrower or such Subsidiary and an
unaffiliated entity.
Section 11.26. No Management/Ownership Change. Suffer James G. Binch to: (a)
cease to be the President of Borrower and performing such duties normally
associated with such position, or (b) cease to be the beneficial owner of
280,000 shares of stock of, and warrants in, Borrower currently beneficially
owned by James G. Binch.
Section 11.27. Leasebacks. Lease any real estate or other capital asset from
any lessor who shall have acquired such property from Borrower.
Section 11.28. CII Agreement. Amend the CII Agreement or
make payment of any sums to CII in violation of the CII Agreement.
C. Financial Covenants.
Borrower agrees and covenants that from the date hereof until the payment and
performance in full of all Obligations, and until the termination of this
Agreement, Borrower shall not:
Section 11.29. Tangible Net Worth. Permit its Tangible Net Worth to be less
than (a) $4,500,000 on June 30, 1998 and at the end of each and every fiscal
quarter thereafter through and including March 31, 1999, (b) $5,500,000 on June
30, 1999 and at the end of each and every fiscal quarter thereafter through and
including March 31, 2000, and (c) $6,500,000 at the end of each and every fiscal
quarter thereafter.
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Section 11.30. Debt to Worth Ratio. Permit its Debt to Worth Ratio to be less
than (a) 1.5 to 1.0 on June 30, 1998 and at the end of each and every fiscal
quarter thereafter through and including March 31, 1999, (b) 1.25 to 1.0 on June
30, 1999 and at the end of each and every fiscal quarter thereafter through and
including March 31, 2000, and (c) 1.0 to 1.0 at the end of each and every fiscal
quarter thereafter.
Section 11.31. Debt Service Coverage Ratio. Permit its Debt Service Coverage
Ratio for each period of four (4) consecutive fiscal quarters to be less than
(a) 1.5 to 1.0 on June 30, 1998 and at the end of each and every fiscal quarter
thereafter through and including March 31, 1999, (b) 1.75 to 1.0 on June 30,
1999 and at the end of each and every fiscal quarter thereafter through and
including March 31, 2000, and (c) 2.0 to 1.0 at the end of each and every fiscal
quarter thereafter.
Section 11.32. Leverage Ratio. Permit its Leverage Ratio for each period of
four (4) consecutive fiscal quarters to be more than 3.0 to 1.0 on June 30, 1998
and at the end of each and every fiscal quarter thereafter.
Section 11.33. EBIT to Interest Ratio. Permit its EBIT to Interest Ratio for
each period of four (4) consecutive fiscal quarters to be less than 3.0 to 1.0
on June 30, 1998 at the end of each and every fiscal quarter thereafter.
ARTICLE XII. Collateral
Section 12.1. Grant. To secure the prompt payment and performance of each and
all of the Obligations, the Borrower pledges, assigns, transfers and grants to
Lender a continuing first priority security interest in the following property
of Borrower, whether now owned or hereafter acquired or arising (the
"Collateral"):
(a) All accounts and accounts receivable related to or arising from the sale
or lease of inventory or rendition of services by Borrower (the "Accounts") and
all other accounts, bank accounts, contracts, contract rights, Notes, documents,
chattel paper, instruments, acceptances, drafts or other forms of obligations
and receivables (collectively with the Accounts, the "Receivables"), whether or
not the same are listed on any schedules assignments or reports furnished to
Lender from time to time, and whether such Receivables are now existing or are
created or arise at any time hereafter, together with all goods, inventory and
merchandise returned by or reclaimed by or repossessed from customers wherever
such goods, inventory and merchandise are located, and all proceeds thereto
including without limitation, proceeds of insurance thereon and all guaranties,
securities, and liens which Borrower may hold for the payment of any such
Receivables, including without limitation, all
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rights of stoppage in transit, replevin and reclamation and all other rights and
remedies of an unpaid vendor or lienor, and any liens held by Borrower as a
mechanic, contractor, subcontractor, processor, materialman, machinist
manufacturer, artisan, or otherwise;
(b) All documents, instruments, documents of title, general intangibles,
policies and certificates of insurance, guaranties, securities chattel paper,
deposits, tax returns, proceeds of insurance, proceeds of an eminent domain or
condemnation award, cash, liens or other property, which are now or may
hereinafter be in the possession of Borrower or as to which Borrower may now or
hereafter control possession by documents of title or otherwise, including, but
not limited to, all property allocable to unshipped orders relating to
Receivables and Inventory;
(c) All books, records, customer lists, supplier lists, ledgers, evidences of
shipping, invoices, purchase orders, sales orders and all other evidences of
Borrower's business records, including all cabinets, drawers, etc. that may hold
the same; computer records, lists, software, programs, wherever located, all
whether now existing or hereafter arising or acquired;
(d) All of Borrower's inventory, whether now owned or hereafter acquired
(collectively, the "Inventory"), including without limitation : (i) all goods
manufactured or acquired for sale or lease, and any piece goods, raw materials,
work in process and finished merchandise, findings or component materials, and
all supplies, goods, incidentals, office supplies, packaging materials, and any
and all items including machinery and equipment used or consumed in the
operation of the business of Borrower or which contribute to the finished
product or to the, sale, promotion and shipment thereof, in which Borrower may
now or at any time hereafter have an interest, whether or not such inventory is
listed in this Agreement on any reports furnished to Lender from time to time;
(ii) all inventory whether or not the same is in transit or in the constructive,
actual or exclusive occupancy or possession of Borrower or is held by Borrower
or by others for the Accounts, including without limitation, all goods covered
by purchase orders and contracts with suppliers and all goods billed and held by
suppliers; (iii) all inventory which may be located on the premises of Borrower
or of any carrier, forwarding agents, truckers, warehousemen, vendors, selling
agents or third parties; (iv) all general intangibles relating to or arising out
of inventory; (v) all proceeds and products of the foregoing resulting from the
sale, lease or other disposition of inventory, including cash, accounts
receivable, other non-cash proceeds and trade-ins; and (vi) with respect to
after-acquired inventory, the security interest shall be deemed to be a purchase
money security interest;
(e) All general intangibles, including without limitation, tax refunds,
investment property, proceeds of insurance eminent domain awards,
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condemnation proceeds, and patents, copyrights, tradenames, trademarks,
applications therefor, and licenses to any patent, copyright, trademark, or
tradename that Borrower now owns, has the right to use or may hereafter own or
acquire the right to use;
(f) All equipment, machinery, appliances, and furniture and fixtures, now
existing or hereafter arising, wherever located, and all contracts, contract
rights and chattel paper arising out of any lease of any of the foregoing;
(g) All other collateral in which Borrower may hereafter grant to Lender a
security interest; and
(h) All renewals, substitutions, replacements, additions, accessions,
proceeds, and products of any and all of the foregoing, including without
limitation, all proceeds of credit, fire and other insurance and also including,
without limitation, rents and profits resulting from the temporary use of the
Collateral.
Provided, however, that notwithstanding anything in this Section 12.1 to the
contrary: (A) the priority of Lender's lien in chattel paper shall be subject to
the proper perfection thereof; (B) the Lender's lien in Borrower's intellectual
property is subject to existing licenses of certain thereof to Raychem
corporation, and to existing licenses of certain thereof to Automation
Electronics, Inc.; and (C) the Collateral shall not include any of Borrower's
right, title and interest in, to and under any of the following: (i) Borrower's
inventory of finished goods and work-in-process of its Ultravalve microprocessor
controlled bath and shower valves product line (the "Product Line"), including
the version of the Memrysafe valve used in the Product Line (which is not
currently used by Borrower for any other purpose), as well as the raw materials
owned by Borrower that are used exclusively for the Product Line; (ii) the
Borrower's registered trademark Ultravalve, with U.S. Registration No. 2,122,691
and a registration date of December 23, 1997; (iii) the Borrower's U.S. patent
no. Des. 313,761, dated January 15, 1991, actuator plate for temperature control
valve; (iv) the following intellectual property of the Borrower, to the extent
(and only to the extent) that they relate exclusively to the Product Line or
Borrower's business of manufacturing and selling the Product Line: (a) all trade
dress and logos, including any goodwill associated therewith; (b) all
copyrightable works, all copyrights, and any applications, registrations and
renewals in connection therewith; (c) all trade secrets and confidential
business information (including ideas, research and development, know-how,
formulas, compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, schematics, diagrams, test procedures,
specifications, customer and supplier lists, catalogs, pricing and cost
information, and business and marketing plans and proposals); (d) all other
similar proprietary rights; and (e) all copies and tangible embodiments thereof
(in whatever form or medium);
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(v) the specified tangible assets of Borrower set forth on Schedule 12.1 hereto;
and (vi) Borrower's right, title and interest in, to and under (x) the
Agreement, dated February 22, 1995, between the Borrower and American Standard,
Inc., (y) the IAPMO Research and Testing, Inc. Certificate of Listing relating
to the Product Line, and (z) the Underwriters Laboratories Inc. listings
relating to the Product Line.
ARTICLE XIII. Events of Default
Section 13.1. Events of Default. Any and all Obligations, including without
limitation, the Obligations arising pursuant to or in connection with the Loans,
shall, at the option of Lender and notwithstanding any time or credit allowed by
any Notes or agreement, become immediately due and payable if any one or more of
the following events (collectively, "Events of Default" and individually, an
"Event of Default") shall occur:
(a) Borrower's failure to pay principal, interest or, within three (3) days
of when due, any other sum due hereunder or under the Notes;
(b) Borrower's failure to pay or perform when due any other covenant, duty,
indebtedness, liability or obligation arising under this Agreement, the Notes or
any of the other Financing Agreements, or any other Obligation (provided,
however, that the Borrower's failure to perform any of the obligations set forth
in Sections 11.3, 11.6, 11.7, 11.9, 11.12, 11.13 and 11.16 shall not constitute
an Event of Default unless and until such failure continues for thirty (30) days
or more);
(c) the making by Borrower of any misrepresentation of a material fact to
Lender;
(d) the filing, making or issuance of any lien, levy, seizure, attachment,
garnishment, injunction, execution, tax lien or judgment upon or against
Borrower or any of the Collateral, or any other property or assets of Borrower
which is not discharged or removed within a period of thirty (30) days from the
date of such filing, making or issuance;
(e) any of the following of, by, or involving Borrower: insolvency (failure
to pay debts as they mature or where the fair value of assets is not in excess
of liabilities); business failure; appointment of a receiver or custodian;
assignment for the benefit of creditors; calling of a meeting of creditors;
appointment of a committee of creditors, or liquidating banks, or offering of a
composition extension to creditors; or the commencement of any proceedings under
any bankruptcy or insolvency law;
(f) Borrower's failure to keep the Collateral insured against loss by fire or
otherwise for the full insurable value thereof with companies and for
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coverages (including Lender's Long Form Loss Payable Endorsement) acceptable to
Lender and making the loss, if any, payable to Lender;
(g) the loss, revocation or failure to renew any license and/or permit now
held or hereafter acquired by Borrower which materially adversely affects the
ability of Borrower to continue their operations as presently conducted;
(h) the declaration of a default under any obligation of Borrower for
borrowed money to any other creditor;
(i) the receipt by Lender of a Default Notice from Raychem Corporation (as
defined in the Lessor's Agreement from Raychem Corporation);
(j) the occurrence of any event or circumstance with respect to the Borrower
such that Lender shall reasonably and in good faith believe that the prospect of
payment of all or any part of Obligations or the performance by the Borrower
under this Agreement, or any other agreement between the Lender and the
Borrower, is impaired; or
(k) the receipt by Lender of a Put Notice from Connecticut Innovations, Inc.
(as defined in the CII Agreement).
Upon the occurrence of any Event of Default, at the option of Lender: (x) any
and all Obligations, including without limitation, the Obligations arising from
or in connection with the Loans, shall become immediately due and payable, and
(y) Borrower's eligibility to request any further Loans shall automatically and
immediately terminate, without presentment, demand, protest, notice of protest
or other notice or requirements of any kind, all of which Borrower expressly
waives. Notwithstanding the foregoing sentence, if any Event of Default under
clause (e) occurs, the acceleration of the Obligations and termination of
Borrower's eligibility to request further Loans shall be automatic.
At any time after an Event of Default, Lender may proceed to enforce the
rights of Lender whether by suit in equity or by action at law, whether for
specific performance of any covenant or agreement contained in this Agreement,
the Notes or the other Financing Agreements, or in aid of the exercise of any
power granted in either this Agreement or the Notes or any other Financing
Agreement, or it may proceed to obtain judgment or any other relief whatsoever
appropriate to the enforcement of such rights, or proceed to enforce any legal
or equitable right which Lender may have by reason of the occurrence of any
Event of Default hereunder.
ARTICLE XIV. Collection of Receivables
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Section 14.1. Lockbox Agreement. All Receivables shall be directed to and
deposited in a lockbox established by Lender pursuant to the Lockbox Agreement.
Section 14.2. Computation. Collections of Receivables shall be credited to
the Obligations of Borrower; provided, however, that all credits shall be
conditional credits subject to collection and that returned items at Lender's
option, may be charged to Borrower; and further provided that for purposes of
the computation of interest, items shall not be deemed to be collected until
three (3) days after their actual receipt by Lender.
ARTICLE XV. Returned Merchandise
Section 15.1. Procedures. The Borrower shall promptly notify Lender of any
credits, adjustments or disputes arising concerning the goods or services
represented by Receivables. Borrower will immediately pay Lender from its own
funds (and not from the proceeds of Receivables), for application to the
Revolving Loans, an amount equal to any credit or adjustment made to any
Eligible Accounts; provided, however, that so long as Borrower is not in default
hereunder, such payment need not be made if Borrower shall have, after making
such credit or adjustment, sufficient Receivables to maintain the aggregate
outstanding balance of the Revolving Loans under the Revolving Loan Borrowing
Base.
ARTICLE XVI. Rights and Remedies of Lender
Section 16.1. Remedies of Lender. Upon the occurrence of any Event of
Default, Lender shall have in any jurisdiction where enforcement of this
Agreement, the Notes or any other Financing Agreement is sought, in addition to
all other rights and remedies which Lender may have under law and equity, the
following rights and remedies, all of which may be exercised with or without
further notice to Borrower and without a prior judicial or administrative
hearing, which notice and hearing are expressly waived: to occupy any of
Borrower's premises for up to six (6) months rent free for the purposes of
liquidating Collateral, including, without limitation, conducting an auction
thereon; to enforce or foreclose the liens and security interests created under
this Agreement or under any other agreement relating to Collateral by any
available judicial procedure or without judicial process; to enter any premises
where any Collateral may be located for the purpose of taking possession or
removing the same; to sell, assign, lease, or otherwise dispose of Collateral or
any part thereof, either at public or private sale, in lots or in bulk, for
cash, on credit or otherwise, with or without representations or warranties, and
upon such terms as shall be acceptable to Lender, all at Lender's sole option
and as Lender in its sole discretion may deem advisable; to bid or become
purchaser at any such sale if public; and, at the option of Lender to apply or
be
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credited with the amount of all or any part of the Obligations owing to Lender
against the purchase price bid by Lender at any such sale.
Section 16.2. Specific Powers. Lender may at any time, before (only with
respect to clauses (v), (vii) and (x) of this Section 16.2) or after the
occurrence of an Event of Default and during the continuance of an Event of
Default, at Lender's sole discretion: (i) give notice of assignment to any
Account Debtor (it being agreed and understood that Lender may at any time,
before or after demand for payment of the Revolving Loan or the occurrence of an
Event of Default, verify receivables directly with Account Debtors); (ii)
collect Receivables directly and charge, or cause to be charged, the collection
costs and expenses to the Revolving Loan Account; (iii) collect receivables
submitted by Borrower to Lender for collection and charge, or cause to be
charged, the collection costs and expenses to the Revolving Loan Account; (iv)
settle or adjust disputes and claims directly with Account Debtors for amounts
and upon terms which Lender considers advisable, and credit, or cause to be
credited, the Revolving Loan Account with the net amounts received in payment of
Receivables; (v) exercise all other rights granted in this Agreement and the
other Financing Agreements; (vi) receive, open and dispose of all mail addressed
to Borrower and notify the Post Office authorities to change the address for
delivery of Borrower's mail to an address designated by Lender; (vii) endorse
the name of Borrower on any checks or other evidence of payment that may come
into possession of Lender and on any invoice, freight or express bill, bill of
lading or other document; (viii) in the name of Borrower or otherwise, demand,
sue for, collect and give acquittance for any and all monies due or to become
due on Receivables; (ix) compromise, prosecute or defend any action, claim or
proceeding concerning Receivables; and (x) do any and all things necessary and
proper to carry out the purposes contemplated in this Agreement, the other
Financing Agreements and any other agreement between the parties. Neither Lender
nor any person acting as its representative hereunder shall be liable for any
acts or omissions or for any error of judgment or mistake of fact or law, except
for gross negligence or willful misconduct. Borrower agrees that the powers
granted hereunder, being coupled with an interest, shall be irrevocable so long
as any Obligation remains unsatisfied. Notwithstanding the foregoing, it is
understood that Lender is under no duty to take any of the foregoing actions and
that after having made demand upon the Account Debtors for payment, Lender shall
have no further duty as to the collection or protection of Receivables or any
income therefrom and no further duty to preserve any rights pertaining thereto,
other than the safe custody thereof in the event Lender takes possession
thereof.
Section 16.3. Duties After Default. After the occurrence and during the
continuance of an Event of Default, Borrower will, at Lender's request, assemble
all Collateral and make it available to Lender at places which Lender may
reasonably select, whether at the premises of Borrower or elsewhere, and will
make available to Lender all premises and facilities of
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Borrower for the purpose of Lender taking possession of Collateral or of
removing or putting the Collateral in salable form. In the event that Lender
elects to exercise its right to take possession and control of any Collateral,
and any goods called for in any sales order, contract, invoice or other
instrument or agreement evidencing or purporting to give rise to any Receivable
shall not have been delivered or shall be claimed to be defective by any
customer, Lender shall have the right in its sole discretion to use and deliver
to such customer any goods of Borrower to fulfill such order, contract or the
like so as to make good any such Receivable. If any Collateral shall require
repairing, maintenance, preparation, or the like, or is in process or other
unfinished state, Lender shall have the right, but shall not be obligated, to
effectuate such repair, maintenance, preparation, processing or completion of
manufacturing for the purpose of putting the same in such salable form as Lender
shall deem appropriate, provided that Lender shall nonetheless have the right to
sell or dispose of such Collateral without such processing. The net cash
proceeds resulting from the collection, liquidation, sale, lease or other
disposition of Collateral shall be applied first to the expenses (including all
attorneys' and professionals' fees) of retaking, holding, storing, processing
and preparing for sale, selling, collecting, liquidating and the like such
collateral, and then to the satisfaction of all Obligations, (application as to
any particular Obligations or against principal or interest to be at Lender's
sole discretion), and then, upon full and final payment of the Obligations, and
unless otherwise prohibited by court order or law, to Borrower, it being agreed
that if any such payment made to Lender is recovered from or repaid by Lender in
whole or in part in any bankruptcy, insolvency or similar proceeding instituted
by or against Borrower, this Agreement automatically shall be reinstated without
any further action by Borrower and Lender. Borrower shall be liable to Lender
and shall pay to Lender on demand any deficiency which may remain after such
sale, disposition, collection or liquidation of Collateral.
Section 16.4. Cumulative Remedies. The enumeration of Lender's rights and
remedies set forth in this Article XVI is not intended to be exhaustive and the
exercise by Lender of any right or remedy hereunder shall not preclude the
exercise of any other rights or remedies, all of which shall be cumulative and
shall be in addition to any other right or remedy given hereunder or under any
other agreement between the parties or which may now or hereafter exist in law
or at equity or by suit or otherwise. No delay or failure to take action on the
part of Lender in exercising any right, power or privilege shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or privilege preclude other or further exercise thereof or the exercise of
any other right, power or privilege or shall be construed to be a waiver of any
Event of Default. No course of dealing between Borrower and Lender or its
employees shall be effective to change, modify or discharge any provision of
this Agreement or to constitute a waiver of any Event of Default.
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ARTICLE XVII. Term
Section 17.1. Term and Termination.
(a) Revolving Loan. Unless sooner terminated by Lender as a result of the
occurrence of an Event of Default, Borrower's eligibility to request Revolving
Loans shall commence on the date hereof and shall continue for a period through
and including June 30, 2001 (the "Revolving Loan Term"). Borrower's eligibility
to request Revolving Loans may be extended after the Revolving Loan Term only
with the express written consent of both Borrower and Lender. At the end of the
Revolving Loan Term, Borrower shall pay the entire balance of the Revolving
Loans, the Equipment Loans, the Converted Equipment Loans, the Term Loan and all
other outstanding Obligations. Further, upon termination of the Revolving Loan
facility all of the rights, interests and remedies of Lender and Obligations of
Borrower shall survive and Borrower shall have no right to receive, and Lender
shall have no obligation to make, any further Loans.
(b) Term Loan. Unless sooner terminated by Lender as a result of the
occurrence of an Event of Default (including without limitation the failure to
pay the Revolving Note upon demand or on its due date), the Term Loan shall be
due and payable in fifty-nine (59) consecutive monthly installments of principal
in the amount of $8,333.33 (plus interest in arrears) commencing on August 1,
1998 and continuing on the first day of each and every month thereafter through
and including June 1, 2003, and (b) one final installment of $8,332.53, plus all
accrued and unpaid interest, principal and any other sums due hereunder or under
the Term Loan Note on June 30, 2003.
(c) Initial Equipment Loans. Unless sooner terminated by Lender as a result
of the occurrence of an Event of Default (including without limitation the
failure to pay the Revolving Note on its due date), Borrower's eligibility to
request Initial Equipment Loans shall commence on the date hereof and shall
continue for a period until the Initial Equipment Loan Conversion Date and
Borrower shall thereafter have no right to receive, and Lender shall have no
obligation to make, any further Initial Equipment Loans.
(d) Subsequent Equipment Loans. Unless sooner terminated by Lender as a
result of the occurrence of an Event of Default (including without limitation
the failure to pay the Revolving Note on its due date), Borrower's eligibility
to request Subsequent Equipment Loans shall commence on the Initial Equipment
Loan Conversion Date and shall continue for a period until the Subsequent
Equipment Loan Conversion Date and Borrower shall thereafter have no right to
receive, and Lender shall have no obligation to make, any further Subsequent
Equipment Loans.
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(e) Final Equipment Loans. Unless sooner terminated by Lender as a result of
the occurrence of an Event of Default (including without limitation the failure
to pay the Revolving Note on its due date), Borrower's eligibility to request
Final Equipment Loans shall commence on the Subsequent Equipment Loan Conversion
Date and shall continue for a period through and including the Final Equipment
Loan Maturity Date and Borrower shall thereafter have no right to receive, and
Lender shall have no obligation to make, any further Final Equipment Loans.
(f) Initial Converted Equipment Loans. Unless sooner terminated by Lender as
a result of the occurrence of an Event of Default (including without limitation
the failure to pay the Revolving Note on its due date), the Initial Converted
Equipment Loans shall be due and payable in thirty-six (36) consecutive equal
monthly installments of principal, each equal to 1/36th of the outstanding
principal balance of the Equipment Loan Note as of the Initial Equipment Loan
Conversion Date (plus interest in arrears), commencing on July 1, 1999 and
continuing on the first day of each and every month thereafter through and
including June 30, 2002. Notwithstanding the foregoing, principal, accrued and
unpaid interest and any other amounts due hereunder or under the Initial
Converted Equipment Loan Note shall be due and payable in full on June 30, 2002.
(g) Subsequent Converted Equipment Loans. Unless sooner terminated by Lender
as a result of the occurrence of an Event of Default (including without
limitation the failure to pay the Revolving Note on its due date), the
Subsequent Converted Equipment Loans shall be due and payable in thirty-six (36)
consecutive equal monthly installments of principal, each equal to 1/36th of the
outstanding principal balance of the Equipment Loan Note as of the Subsequent
Equipment Loan Conversion Date (plus interest in arrears), commencing on July 1,
2000 and continuing on the first day of each and every month thereafter through
and including June 1, 2003. Notwithstanding the foregoing, principal, accrued
and unpaid interest and any other amounts due hereunder or under the Subsequent
Converted Equipment Loan Note shall be due and payable in full on June 30, 2003.
(h) Final Converted Equipment Loans. Unless the Revolving Loan is not renewed
or unless the Final Converted Equipment Loan is sooner terminated by Lender as a
result of the occurrence of an Event of Default (including without limitation
the failure to pay the Revolving Note on its due date), the Final Converted
Equipment Loans shall be due and payable in thirty-six (36) consecutive equal
monthly installments of principal, each equal to 1/36th of the outstanding
principal balance of the Equipment Loan Note as of the Final Equipment Loan
Conversion Date (plus interest in arrears), commencing on July 1, 2001 and
continuing on the first day of each and every month thereafter through and
including June 1, 2004. Notwithstanding the
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foregoing, principal, accrued and unpaid interest and any other amounts due
hereunder or under the Final Converted Equipment Loan Note shall be due and
payable in full on June 30, 2004.
(i) Termination of Obligations. Upon full, final and indefeasible payment of
the Obligations to Lender, all rights and remedies of Borrower and Lender
hereunder shall cease, so long as any payment so made to Lender and applied to
the Obligations is not thereafter recovered from or repaid by Lender in whole or
in part in any bankruptcy, insolvency or similar proceeding instituted by or
against Borrower, whereupon this Agreement shall be automatically reinstated
without any further action by Borrower and Lender and shall continue to be fully
applicable to such Obligations to the same extent as though the payment so
recovered or repaid had never been originally made on such Obligations.
ARTICLE XVIII. Miscellaneous
Section 18.1. Indemnification.
(a) In consideration of Lender's execution and delivery of this Agreement and
Lender's making of the Loans hereunder and in addition to all other obligations
of Borrower under this Agreement, Borrower hereby agrees to defend, protect,
indemnify and hold harmless Lender, its successors, assigns, officers,
directors, employees and agents (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(individually, each an "Indemnitee" and collectively, the "Indemnitees") from
and against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages and expenses in connection therewith
(irrespective of whether any such Indemnitees is a party to any action for which
indemnification hereunder is sought), and including reasonable attorneys' fees
and disbursements as and when incurred (collectively, the "Indemnifiable
Liabilities") incurred by the Indemnitees or any of them as a result of, or
arising out of, or relating to (i) the execution, delivery, performance or
enforcement of this Agreement and the other Financing Agreements and any
instrument, document or agreement executed pursuant hereto to any of the
Indemnitees; (ii) Lender's status as lender to, or creditor of, Borrower; or
(iii) the operation of Borrower's business from and after the date hereof,
including, without limitation, those arising under any Environmental Law. To the
extent that the foregoing undertaking by Borrower may be unenforceable for any
reason, Borrower shall make the maximum contribution to the payment and
satisfaction of each of the Indemnifiable Liabilities which is permissible under
applicable law.
(b) The Borrower hereby covenants and agrees at all times to indemnify, hold
harmless and defend the Indemnitees, whether as secured party
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in possession or as successor in interest to Borrower as owner of any personal
property assets located on the real property of Borrower by virtue of any action
taken by Lender pursuant to the Financing Agreements, the Uniform Commercial
Code (as in effect in any applicable jurisdiction) or otherwise, from and
against any and all liabilities, losses, damages, costs, expenses, penalties,
fines, causes of actions, suits, claims, demands or judgments, including,
without limitation, attorneys' fees and expenses, suffered or incurred in
connection with: (i) the Environmental Laws, including, without limitation,
liens or claims of any federal, state or municipal government or
quasi-governmental agency or any third person, whether arising under any
Environmental Law or any other federal, state or municipal law or regulation;
(ii) any spill or contamination affecting the Premises or any other property
owned, leased, controlled or used by Borrower, including, without imitation, any
Hazardous Substance or other waste-like or toxic substances located on, under,
emanating from or relating to the Premises or such property from and on and
after the date hereof or any portion of any thereof or any property contiguous
to the Premises or such property from and after the date hereof, and including,
without limitation, any loss of value of the Premises or such property as a
result of any such spill or contamination; and (iii) the direct or indirect
installation, use, generation, manufacture, production, storage, release,
threatened release, discharge, disposal or presence of any Hazardous Substance
on under or about the Premises or any other property owned, leased, controlled
or used by Borrower or any portion of any thereof, from and including all
consequential damages, the costs of any required or necessary repair, cleanup or
detoxification, and the costs of the preparation and implementation of any
closure, remedial or other required plans; provided, however, that Borrower
shall have no obligation to indemnify the Indemnitees under this Section 18.1(b)
for claims or losses resulting solely from the Indemnitees' Parties own
negligent action while on the Premises or property of Borrower. Further, is
expressly agreed and understood that the mere fact that an Indemnitee has been
declared an "owner" or "operator" (as such term is defined in any Environmental
Law) resulting from such Indemnitee having taking possession of any of the
Collateral (without any negligence on the part of such Indemnitee) shall not
exonerate Borrower from any claim by such Indemnitee or any other Indemnitee
seeking indemnification.
Section 18.2. Payment Set-Aside. To the extent that Borrower makes a payment
or payments to Lender (whether hereunder, under the Notes, or under the other
Financing Agreements) or Lender enforces its security interests or rights or
exercises its right of setoff; and such payment or payments or the proceeds of
such enforcement or setoff or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to Borrower, a
trustee, receiver or any other person under any law (including, without
limitation, any bankruptcy law, state or federal law, common law or equitable
cause of action) in connection with any bankruptcy or
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similar proceeding involving Borrower, then to the extent of any such
restoration the obligation or part thereof originally intended to be satisfied
shall be revived and continued in full force and effect as if such payment had
not been made or such enforcement or setoff had not occurred.
Section 18.3. Set-off. The Borrower hereby grants to Lender a lien and right
of setoff for all its liabilities to Lender upon and against all its deposits,
credits, collateral and property now or hereafter in the possession or control
of Lender or in transit to Lender. Lender may, upon the occurrence of any Event
of Default or Defaulting Event or both, apply or exercise the right of set off
against any or all of the foregoing or any part of any thereof against any
liability of Borrower to Lender, regardless whether such liability is matured or
unmatured.
Section 18.4. Covenants to Survive; Binding Agreement. All covenants,
agreements, warranties and representations made herein, in the Notes, in the
other Financing Agreements, and in all certificates or other documents of
Borrower shall survive the advances of money made by Lender to Borrower
hereunder and the delivery of the Notes and the other Financing Agreements, and
all such covenants, agreements, warranties and representations shall be binding
upon and inure to the benefit of Lender and its successors and assigns, whether
or not so expressed.
Section 18.5. Cross-Collateralization. All Collateral which Lender may at any
time acquire from Borrower or from any other source in connection with
Obligations arising under this Agreement and the other Financing Agreements
shall constitute collateral for each and every Obligation, without apportionment
or designation as to particular Obligations and all Obligations, however and
whenever incurred, shall be secured by all Collateral however and whenever
acquired, and Lender shall have the right, in its sole discretion, to determine
the order in which Lender's rights in or remedies against any Collateral are to
be exercised and which type of Collateral or which portions of Collateral are to
be proceeded against and the order of application of proceeds of Collateral as
against particular Obligations.
Section 18.6. Cross-Default. Borrower acknowledges and agrees that an Event
of Default and/or Defaulting Event under any one of the Financing Agreements
shall constitute an Event of Default or Defaulting Event under each of the other
Financing Agreements.
Section 18.7. Amendments and Waivers. Neither this Agreement, the Notes, the
other Financing Agreements, nor any term, covenant or condition hereof or
thereof may be changed, waived, discharged, modified or terminated except by a
writing executed by the parties hereto or thereto. No failure on the part of
Lender to exercise, and no delay in exercising, any right,
<PAGE>
-65-
remedy or power hereunder or under the Notes or the other Financing Agreements
shall preclude any other or future exercise thereof, or the exercise of any
other right remedy or power.
Section 18.8. Notices. All notices, requests, consents, demands and other
communications hereunder shall be in writing and shall be mailed by first class
mail to the respective parties to this Agreement to the address set forth in the
introductory sentence hereof.
Section 18.9. Transfer of Lender's Interest. Borrower hereby agrees that
Lender, in its sole discretion, may freely sell, assign or otherwise transfer
participations, portions, co-lender interests or other interests in all or any
portion of the indebtedness, liabilities or obligations arising in connection
with or in any way related to the financing transactions of which this Agreement
is a part provided that such transferee is a recognized financial institution.
In the event of any such transfer, the transferee may, in Lender's sole
discretion, have and enforce all the rights, remedies and privileges of Lender.
Borrower consents to the release by Lender to any potential transferee of any
and all information (including, without limitation, financial information)
pertaining to Borrower as Lender, in its sole discretion, may deem appropriate.
If such transferee so participates with Lender in making loans or advances
hereunder or under any other agreement between such Lender and Borrower,
Borrower hereby grants to such transferee and such transferee shall have and is
hereby given a continuing lien and security interest in any money, securities or
other property of Borrower in the custody or possession of such transferee,
including the right of setoff under circumstances consistent with this
Agreement, to the extent of such transferee's participation in the Obligations
of Borrower to Lender.
Section 18.10. Waivers.
(a) THE BORROWER ACKNOWLEDGES THAT THE LOANS EVIDENCED HEREBY ARE COMMERCIAL
TRANSACTIONS AND WAIVES ITS RIGHT TO NOTICE AND HEARING UNDER CHAPTER 903a OF
THE CONNECTICUT GENERAL STATUTES, OR AS OTHERWISE ALLOWED BY ANY STATE OR
FEDERAL LAW WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH LENDER MAY DESIRE TO
USE, AND FURTHER WAIVES ITS RIGHTS TO REQUEST THAT LENDER POST A BOND, WITH OR
WITHOUT SURETY, TO PROTECT BORROWER AGAINST DAMAGES THAT MAY BE CAUSED BY ANY
PREJUDGMENT REMEDY SOUGHT OR OBTAINED BY LENDER. THE BORROWER FURTHER WAIVES
DILIGENCE, DEMAND, PRESENTMENT FOR PAYMENT, NOTICE OF NONPAYMENT, PROTEST AND
NOTICE OF ANY RENEWALS OR EXTENSIONS.
<PAGE>
-66-
(b) THE BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY COURT IN ANY SUIT, ACTION
OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO
THE FINANCING TRANSACTIONS OF WHICH THIS AGREEMENT IS A PART AND/OR THE
ENFORCEMENT OF ANY OF LENDER'S RIGHTS, INCLUDING, WITHOUT LIMITATION, TORT
CLAIMS. THE BORROWER FURTHER ACKNOWLEDGES THAT LENDER HAS NOT REPRESENTED TO
BORROWER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL
INSTANCES.
(c) THE BORROWER ACKNOWLEDGES THAT IT MAKES THE FOREGOING WAIVERS IN CLAUSE
(a) AND CLAUSE (b) ABOVE, KNOWINGLY, VOLUNTARILY, WITHOUT DURESS AND ONLY AFTER
CONSIDERATION OF THE RAMIFICATIONS OF SUCH WAIVERS WITH ITS ATTORNEYS.
Section 18.11. Section Headings; Severability; Entire Agreement. Section and
subsection headings have been inserted herein for convenience only and shall not
be construed as part of this Agreement. Every provision of this Agreement, the
Notes and the other Financing Agreements is intended to be severable; if any
term or provision of this Agreement, the Notes, the other Financing Agreements,
or any other document delivered in connection herewith shall be invalid, illegal
or unenforceable for any reason whatsoever, the validity, legality and
enforceability of the remaining provisions hereof or thereof shall not in any
way be affected or impaired thereby. All Exhibits and Schedules to this
Agreement shall be annexed hereto and shall be deemed to be part of this
Agreement. This Agreement, the other Financing Agreements, and the Exhibits and
Schedules attached hereto and thereto embody the entire agreement and
understanding between Borrower and Lender and supersede all prior agreements and
understandings relating to the subject matter hereof unless otherwise
specifically reaffirmed or restated herein.
Section 18.12. Governing Law, Notice and Service of Process, Pleadings and
Other Papers. This Agreement and the other Financing Agreements, and all
transactions, assignments and transfers hereunder and thereunder, and all the
rights of the parties, shall be governed as to validity, construction,
enforcement and in all other respects by the laws of the State of Connecticut
(but not its conflicts of law provisions). Borrower hereby designates and
appoints, without power of revocation, the Secretary of the State of the State
of Connecticut as Borrower's agent upon whom may be served all process,
pleadings, notices or other papers which may be served upon it as a result of
any of its Obligations under this Agreement or other Financing Agreements.
Borrower agrees that the Superior Court for the Judicial District of
Hartford/New Britain or the United States District Court for the District of
Connecticut shall have jurisdiction to hear and determine any claims or disputes
<PAGE>
-67-
pertaining to the financing transactions of which this Agreement is a part
and/or to any matter arising or in any way related to this Agreement or any
other agreement between Lender and Borrower, and Borrower expressly submits and
consents in advance to such jurisdiction in any action or proceeding.
Section 18.13. Miscellaneous Provisions Regarding Borrower's Documents.
(a) Lender acknowledges that, pursuant to Section 7(b) of the Amended and
Restated Asset Purchase Agreement, dated as of May 10, 1996, between Borrower
and Raychem Corporation, a Delaware corporation ("Raychem"), as amended (the
"Raychem Agreement"), Borrower is required (i) to keep books and records
relating to products which Borrower manufactures and which Raychem manufactured
prior to the Closing (as defined in the Raychem Agreement) for a period of seven
(7) years, and (ii) to maintain all documents purchased from Raychem under the
Raychem Agreement relating in any way to the matters subject to the lawsuit
entitled Intrinsic v. Raychem Corporation during the pendency of such litigation
(including all appeals thereof). In the event that Lender forecloses upon any
such books, records and/or documents at a time when the aforesaid requirements
are still in force, Lender agrees to take possession of such books, records
and/or documents, and/or to sell or otherwise convey such books, records and/or
documents, or cause such books, records and/or documents to be sold or otherwise
conveyed, subject to the aforesaid restrictions.
(b) Lender acknowledges that, pursuant to the definition of the term
"Documents" contained in Section 1 of the Raychem Agreement, Borrower may not
have title to certain documents in Borrower's possession due to the inability of
Raychem to transfer such documents to Borrower without the prior written consent
of various third parties. Lender agrees and acknowledges that its lien upon
Borrower's assets hereunder only covers documents to the extent that Borrower in
fact has any right, title and/or interest in and to the same, and that Lender
will have no more interest in any such documents upon an exercise of any of its
foreclosure or similar rights hereunder than Borrower currently has to such
documents. Borrower represents and warrants to Lender that the aforesaid
documents (i) do not relate to the Borrower's accounts receivable, inventory
and/or machinery and equipment, and (ii) are not material to the Borrower's
respective assets, businesses and/or prospects.
Section 18.14. Waiver. Without limiting the generality of the waivers
contained in this Agreement or in any other Financing Agreement, Borrower
irrevocably waives any right to claim that Lender is not dealing fairly with
Borrower, or for any other reason has any liability to Borrower, regardless of
the status of the business, financial condition, or prospects of Borrower, on
account of Lender taking action to repossess or collect upon the Collateral or
<PAGE>
-68-
otherwise to collect the Obligations as a result of receiving a Put Notice from
Connecticut Innovations, Inc.
[SIGNATURE PAGES FOLLOW]
<PAGE>
-69-
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized officers as of the date first above written.
Witnesses: MEMRY CORPORATION
_____________________________________ By:_______________________________
_____________________________________ Its
Witnessed: WEBSTER BANK
_____________________________________ By________________________________
_____________________________________ Its
STATE OF CONNECTICUT )
) ss. Hartford
COUNTY OF HARTFORD )
Before me, the undersigned, this ____ day of June, 1998, personally appeared
___________________, known to me to be the ____________ of MEMRY CORPORATION and
that he as such officer, signer and sealer of the foregoing instrument,
acknowledged the execution of the same to be his free act and deed individually
and as such officer, and the free act and deed of said corporation.
In Witness Whereof; I hereunto set my hand.
_______________________________________________
Notary Public
My Commission Expires:
Commissioner of the Superior Court
<PAGE>
-70-
STATE OF CONNECTICUT )
) ss. Hartford
COUNTY OF HARTFORD )
Before me, the undersigned, this ____ day of June, 1998 personally appeared
____________, known to me to be the ___________________ of WEBSTER BANK, and
that he as such officer, signer and sealer of the foregoing instrument,
acknowledged the execution of the same to be his free act and deed individually
and as such officer, and the free act and deed of said corporation.
In Witness Whereof; I hereunto set my hand.
_______________________________________________
Notary Public
My Commission Expires:
Commissioner of the Superior Court
<PAGE>
EXHIBIT 10.42
REVOLVING LOAN NOTE
-------------------
$3,000,000 June 30, 1998
For value received, the undersigned, MEMRY CORPORATION, a Delaware
corporation ("MAKER"), promises to pay to WEBSTER BANK, or order ("LENDER"), at
its office at CityPlace II, 5th Floor, HFD 605, Hartford, Connecticut 06103-
3439, or at such other place as the holder hereof (including Lender, hereinafter
referred to as "HOLDER") may designate, the sum of up to THREE MILLION DOLLARS
($3,000,000), together with interest on the unpaid balance of this Note,
beginning as of the date hereof, before or after maturity or judgment, as
provided for in the Loan Agreement (as defined below), together with all taxes
levied (excluding income taxes) or assessed on this Note or the debt evidenced
hereby against the Holder, and together with all reasonable costs, expenses and
reasonable attorneys' and other reasonable professional fees incurred in any
action to collect this Note or to enforce or foreclose any mortgage, security
agreement or other agreement securing this Note or to protect or sustain the
lien of said mortgage, security agreement or other agreement or in any
litigation or controversy arising from or connected with said mortgage, security
agreement or other agreement or this Note.
This Note is made and delivered by Maker pursuant to Section 2.2 of the
Commercial Revolving Loan, Term Loan, Line of Credit and Security Agreement
dated of even date herewith by and between Maker and Lender (as amended and in
effect from time to time, the "LOAN AGREEMENT"), and is entitled to the benefits
and is subject to the provisions of the Loan Agreement. All capitalized terms
used herein which are defined in the Loan Agreement that are not defined herein
shall have the same meanings herein as are ascribed to them in the Loan
Agreement.
The Maker also promises to pay interest on the aggregate unpaid principal
amount of the Revolving Loans until all amounts payable under the Loan Agreement
are paid in full, at the rates per annum set forth in or established pursuant to
the Loan Agreement. Such interest shall be payable on such dates as are
determined from time to time pursuant to the Loan Agreement and shall be
calculated as therein provided. Notwithstanding anything to the contrary, the
entire indebtedness under this Note, including but not limited to, all
outstanding principal and accrued and unpaid interest shall be due and payable
in full on June 30, 2001.
The Maker has the right in certain circumstances to prepay the principal of
this Note on the terms and conditions specified in the Loan Agreement.
If an Event of Default shall occur, the entire unpaid principal amount of
this Note, all of the unpaid interest accrued thereon and any other sum due
<PAGE>
-2-
hereunder may become or be declared due and payable in the manner and with the
effect provided in the Loan Agreement.
THE MAKER HEREBY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY SUIT, ACTION
OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO
THE FINANCING TRANSACTIONS OF WHICH THIS NOTE IS A PART AND/OR THE ENFORCEMENT
OF ANY OF HOLDERS' RIGHTS AND REMEDIES, INCLUDING WITHOUT LIMITATION, TORT
CLAIMS. THE MAKER ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY,
VOLUNTARILY, WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF
THIS WAIVER WITH ITS ATTORNEYS. THE MAKER FURTHER ACKNOWLEDGES THAT LENDER HAS
NOT AGREED WITH OR REPRESENTED TO MAKER THAT THE PROVISIONS OF THIS PARAGRAPH
WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
THE MAKER ACKNOWLEDGES THAT THE LOAN EVIDENCED BY THIS NOTE IS A COMMERCIAL
TRANSACTION AND WAIVES ITS RIGHTS TO NOTICE AND HEARING UNDER CHAPTER 903a OF
THE CONNECTICUT GENERAL STATUTES, OR AS OTHERWISE ALLOWED BY ANY STATE OR
FEDERAL LAW WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH HOLDER MAY DESIRE TO
USE, AND FURTHER WAIVES ITS RIGHTS TO REQUEST THAT HOLDER POST A BOND, WITH OR
WITHOUT SURETY, TO PROTECT SAID MAKER AGAINST DAMAGES THAT MAY BE CAUSED BY ANY
PREJUDGMENT REMEDY SOUGHT OR OBTAINED BY HOLDER. The Maker further waives
diligence, demand, presentment for payment, notice of nonpayment, protest and
notice of protest, and notice of any renewals or extensions of this Note, and
all rights under any statute of limitations, and further consents to the release
of all or any part of the security for the payment hereof, at the discretion of
Holder, or the release of any party liable for this obligation without affecting
the liability of the other parties hereto. The Maker further (i) consents to
any and all delays, extensions, renewals or other modifications of this Note,
any other Financing Agreements or the debts or collateral evidenced hereby or
thereby or any waivers of any term hereof or thereof, any release, surrender,
taking of additional, substitution, exchange, failure to perfect or record any
interest in, failure to preserve or realize upon, failure to lawfully dispose
of, or any other impairment of, any collateral or other security, or any other
failure to act by the Lender or any other forbearance or indulgence shown by the
Lender, from time to time and in one or more instances (without notice to or
assent from the Maker) and agrees that none of the foregoing shall release,
discharge or otherwise impair any of their liabilities; and (ii) waives any
defenses based on suretyship or impairment of collateral. THE MAKER
ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY, WITHOUT DURESS
AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER
<PAGE>
-3-
WITH ITS ATTORNEYS. THE MAKER FURTHER ACKNOWLEDGES THAT LENDER HAS NOT AGREED
WITH OR REPRESENTED TO MAKER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE
FULLY ENFORCED IN ALL INSTANCES.
This Note shall be governed by and construed in accordance with the laws of
the State of Connecticut (but not its conflicts of law provisions).
MEMRY CORPORATION
By:____________________________________
Its
<PAGE>
EXHIBIT 10.43
TERM LOAN NOTE
--------------
$500,000 June 30, 1998
For value received, the undersigned, MEMRY CORPORATION, a Delaware
corporation ("MAKER"), promises to pay to WEBSTER BANK, or order ("LENDER"), at
its office at CityPlace II, 5th Floor, HFD 605, Hartford, Connecticut 06103-
3439, or at such other place as the holder hereof (including Lender, hereinafter
referred to as "HOLDER") may designate, the sum of FIVE HUNDRED THOUSAND DOLLARS
($500,000), together with interest on the unpaid balance of this Note, beginning
as of the date hereof, before or after maturity or judgment, as provided for in
the Loan Agreement (as defined below), together with all taxes levied (excluding
income taxes) or assessed on this Note or the debt evidenced hereby against the
Holder, and together with all reasonable costs, expenses and reasonable
attorneys' and other reasonable professional fees incurred in any action to
collect this Note or to enforce or foreclose any mortgage, security agreement or
other agreement securing this Note or to protect or sustain the lien of said
mortgage, security agreement or other agreement or in any litigation or
controversy arising from or connected with said mortgage, security agreement or
other agreement or this Note.
This Note is made and delivered by Maker pursuant to Section 3.1 of the
Commercial Revolving Loan, Term Loan, Line of Credit and Security Agreement
dated of even date herewith by and between Maker and Lender (as amended and in
effect from time to time, the "LOAN AGREEMENT"), and is entitled to the benefits
and is subject to the provisions of the Loan Agreement. All capitalized terms
used herein which are defined in the Loan Agreement that are not defined herein
shall have the same meanings herein as are ascribed to them in the Loan
Agreement.
The Maker also promises to pay interest on the aggregate unpaid principal
amount of the Term Loan until all amounts payable under the Loan Agreement are
paid in full, at the rates per annum set forth in or established pursuant to the
Loan Agreement. Such interest shall be payable on such dates as are determined
from time to time pursuant to the Loan Agreement and shall be calculated as
therein provided. Notwithstanding anything to the contrary, the entire
indebtedness under this Note, including but not limited to, all outstanding
principal and accrued and unpaid interest shall be due and payable in full on
June 30, 2003.
The Maker has the right in certain circumstances to prepay the principal of
this Note on the terms and conditions specified in the Loan Agreement.
If an Event of Default shall occur, the entire unpaid principal amount of
this Note, all of the unpaid interest accrued thereon and any other sum due
<PAGE>
-2-
hereunder may become or be declared due and payable in the manner and with the
effect provided in the Loan Agreement.
THE MAKER HEREBY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY SUIT, ACTION
OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO
THE FINANCING TRANSACTIONS OF WHICH THIS NOTE IS A PART AND/OR THE ENFORCEMENT
OF ANY OF HOLDER'S RIGHTS AND REMEDIES, INCLUDING WITHOUT LIMITATION, TORT
CLAIMS. THE MAKER ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY,
VOLUNTARILY, WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF
THIS WAIVER WITH ITS ATTORNEYS. THE MAKER FURTHER ACKNOWLEDGES THAT LENDER HAS
NOT AGREED WITH OR REPRESENTED TO MAKER THAT THE PROVISIONS OF THIS PARAGRAPH
WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
THE MAKER ACKNOWLEDGES THAT THE LOAN EVIDENCED BY THIS NOTE IS A COMMERCIAL
TRANSACTION AND WAIVES ITS RIGHTS TO NOTICE AND HEARING UNDER CHAPTER 903a OF
THE CONNECTICUT GENERAL STATUTES, OR AS OTHERWISE ALLOWED BY ANY STATE OR
FEDERAL LAW WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH HOLDER MAY DESIRE TO
USE, AND FURTHER WAIVES ITS RIGHT TO REQUEST THAT HOLDER POST A BOND, WITH OR
WITHOUT SURETY, TO PROTECT SAID MAKER AGAINST DAMAGES THAT MAY BE CAUSED BY ANY
PREJUDGMENT REMEDY SOUGHT OR OBTAINED BY HOLDER. The Maker further waives
diligence, demand, presentment for payment, notice of nonpayment, protest and
notice of protest, and notice of any renewals or extensions of this Note, and
all rights under any statute of limitations, and further consents to the release
of all or any part of the security for the payment hereof, at the discretion of
Holder, or the release of any party liable for this obligation without affecting
the liability of the other parties hereto. The Maker further (i) consents to
any and all delays, extensions, renewals or other modifications of this Note,
any other Financing Agreements or the debts or collateral evidenced hereby or
thereby or any waivers of any term hereof or thereof, any release, surrender,
taking of additional, substitution, exchange, failure to perfect or record any
interest in, failure to preserve or realize upon, failure to lawfully dispose
of, or any other impairment of, any collateral or other security, or any other
failure to act by the Lender or any other forbearance or indulgence shown by the
Lender, from time to time and in one or more instances (without notice to or
assent from the Maker) and agrees that none of the foregoing shall release,
discharge or otherwise impair any of their liabilities; and (ii) waives any
defenses based on suretyship or impairment of collateral. THE MAKER
ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY, WITHOUT DURESS
AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER
<PAGE>
-3-
WITH ITS ATTORNEYS. THE MAKER FURTHER ACKNOWLEDGES THAT LENDER HAS NOT AGREED
WITH OR REPRESENTED TO MAKER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE
FULLY ENFORCED IN ALL INSTANCES.
This Note shall be governed by and construed in accordance with the laws of
the State of Connecticut (but not its conflicts of law provisions).
MEMRY CORPORATION
By:__________________________________
Its
<PAGE>
EXHIBIT 10.44
EQUIPMENT LOAN NOTE
-------------------
$750,000 June 30, 1998
For value received, the undersigned, MEMRY CORPORATION, a Delaware
corporation ("MAKER"), promises to pay to WEBSTER BANK, or order ("LENDER"), at
its office at CityPlace II, 5th Floor, HFD 605, Hartford, Connecticut 06103-
3439, or at such other place as the holder hereof (including Lender, hereinafter
referred to as "HOLDER") may designate, the sum of up to SEVEN HUNDRED FIFTY
THOUSAND DOLLARS ($750,000), together with interest on the unpaid balance of
this Note, beginning as of the date hereof, before or after maturity or
judgment, as provided for in the Loan Agreement (as defined below), together
with all taxes levied (excluding income taxes) or assessed on this Note or the
debt evidenced hereby against the Holder, and together with all reasonable
costs, expenses and reasonable attorneys' and other reasonable professional fees
incurred in any action to collect this Note or to enforce or foreclose any
mortgage, security agreement or other agreement securing this Note or to protect
or sustain the lien of said mortgage, security agreement or other agreement or
in any litigation or controversy arising from or connected with said mortgage,
security agreement or other agreement or this Note.
This Note is made and delivered by Maker pursuant to Section 4.2 of the
Commercial Revolving Loan, Term Loan, Line of Credit and Security Agreement
dated of even date herewith by and between Maker and Lender (as amended and in
effect from time to time, the "LOAN AGREEMENT"), and is entitled to the benefits
and is subject to the provisions of the Loan Agreement. All capitalized terms
used herein which are defined in the Loan Agreement that are not defined herein
shall have the same meanings herein as are ascribed to them in the Loan
Agreement.
The Maker also promises to pay interest on the aggregate unpaid principal
amount of the Equipment Loans until all amounts payable under the Loan Agreement
are paid in full, at the rates per annum set forth in or established pursuant to
the Loan Agreement. Such interest shall be payable on such dates as are
determined from time to time pursuant to the Loan Agreement and shall be
calculated as therein provided. Notwithstanding anything to the contrary, the
entire indebtedness under this Note, including but not limited to, all
outstanding principal and accrued and unpaid interest shall be due and payable
in full on June 30, 2001.
The Maker has the right in certain circumstances to prepay the principal of
this Note on the terms and conditions specified in the Loan Agreement.
<PAGE>
-2-
If an Event of Default shall occur, the entire unpaid principal amount of
this Note, all of the unpaid interest accrued thereon and any other sum due
hereunder may become or be declared due and payable in the manner and with the
effect provided in the Loan Agreement.
THE MAKER HEREBY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY SUIT, ACTION
OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO
THE FINANCING TRANSACTIONS OF WHICH THIS NOTE IS A PART AND/OR THE ENFORCEMENT
OF ANY OF HOLDER'S RIGHTS AND REMEDIES, INCLUDING WITHOUT LIMITATION, TORT
CLAIMS. THE MAKER ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY,
VOLUNTARILY, WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF
THIS WAIVER WITH ITS ATTORNEYS. THE MAKER FURTHER ACKNOWLEDGES THAT LENDER HAS
NOT AGREED WITH OR REPRESENTED TO MAKER THAT THE PROVISIONS OF THIS PARAGRAPH
WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
THE MAKER ACKNOWLEDGES THAT THE LOAN EVIDENCED BY THIS NOTE IS A COMMERCIAL
TRANSACTION AND WAIVES ITS RIGHTS TO NOTICE AND HEARING UNDER CHAPTER 903a OF
THE CONNECTICUT GENERAL STATUTES, OR AS OTHERWISE ALLOWED BY ANY STATE OR
FEDERAL LAW WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH HOLDER MAY DESIRE TO
USE, AND FURTHER WAIVES ITS RIGHT TO REQUEST THAT HOLDER POST A BOND, WITH OR
WITHOUT SURETY, TO PROTECT SAID MAKER AGAINST DAMAGES THAT MAY BE CAUSED BY ANY
PREJUDGMENT REMEDY SOUGHT OR OBTAINED BY HOLDER. The Maker further waives
diligence, demand, presentment for payment, notice of nonpayment, protest and
notice of protest, and notice of any renewals or extensions of this Note, and
all rights under any statute of limitations, and further consents to the release
of all or any part of the security for the payment hereof, at the discretion of
Holder, or the release of any party liable for this obligation without affecting
the liability of the other parties hereto. The Maker further (i) consents to
any and all delays, extensions, renewals or other modifications of this Note,
any other Financing Agreements or the debts or collateral evidenced hereby or
thereby or any waivers of any term hereof or thereof, any release, surrender,
taking of additional, substitution, exchange, failure to perfect or record any
interest in, failure to preserve or realize upon, failure to lawfully dispose
of, or any other impairment of, any collateral or other security, or any other
failure to act by the Lender or any other forbearance or indulgence shown by the
Lender, from time to time and in one or more instances (without notice to or
assent from the Maker) and agrees that none of the foregoing shall release,
discharge or otherwise impair any of their liabilities; and (ii) waives any
defenses based on suretyship or impairment of collateral. THE MAKER ACKNOWLEDGES
THAT IT MAKES THIS
<PAGE>
-3-
WAIVER KNOWINGLY, VOLUNTARILY, WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF
THE RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEYS. THE MAKER FURTHER
ACKNOWLEDGES THAT LENDER HAS NOT AGREED WITH OR REPRESENTED TO MAKER THAT THE
PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
This Note shall be governed by and construed in accordance with the laws of
the State of Connecticut (but not its conflicts of law provisions).
MEMRY CORPORATION
By:____________________________________
Its
<PAGE>
EXHIBIT 10.45
AMENDMENT OF SUBLEASE
---------------------
THIS AMENDMENT OF SUBLEASE ("Amendment") is made and entered into as of
March 26, 1998, by and between RAYCHEM CORPORATION, a Delaware corporation
("Sublessor"), and MEMRY CORPORATION, a Delaware corporation ("Sublessee").
R E C I T A L S:
- - - - - - - -
A. Sublessor and Sublessee have heretofore entered into that certain
Sublease dated of June 28, 1996 ("Sublease"), pursuant to which Sublessor leased
to Sublessee certain premises more particularly described therein ("Subleased
Premises"). Sublessor leases the Subleased Premises from 4065 Associates, a
California partnership ("Master Lessor") pursuant to the Lease (as defined in
the Sublease).
B. Sublessor and Sublessee now desire to amend the Sublease on the terms
and provisions contained in this Amendment. Except as otherwise defined herein,
capitalized terms used in this Amendment shall have the meanings given to such
terms in the Sublease.
NOW, THEREFORE, Sublessor and Sublessee hereby agree to amend the Sublease
as follows:
1. Option to Extend. Sublessor hereby grants to Sublessee the option to
----------------
extend the Sublease Term for one additional three (3) year period ("Renewal
Term"), which shall commence on October 1, 1998 and end on September 30, 2001,
on all of the terms and provisions contained in the Sublease, except that the
monthly rental payable under the Sublease shall be in the amount provided for in
Section 2 below, and except that Sublessee shall have no further option or right
to extend the Sublease Term. By its execution of this Amendment, Sublessee
hereby exercises such option to extend. Sublessor shall exercise its option to
extend the term of the Lease under Section 2.5 thereof, and shall use diligent,
good faith efforts to cause the term of the Lease to be extended in accordance
with such exercise by Sublessor. Notwithstanding the foregoing, if despite
Sublessor's exercise of its option to extend the term of the Lease, and if
despite Sublessor's use of diligent, good faith efforts to cause the term of the
Lease to be extended, the term of the Lease shall not be extended, or Master
Lessor shall claim that the term of the Lease has not been extended, then this
Sublease shall expire at the end of the Sublease Term. As used in the Sublease,
the term "Sublease Term" shall mean the Sublease Term as the same may be
extended pursuant to the provisions of this Section 1, as applicable.
<PAGE>
2. Renewal Term Rent. If Sublessee shall validly extend the Sublease
-----------------
Term, the monthly rental payable by Sublessee to Sublessor under the Sublease
for the Renewal Term shall be equal to the monthly rental payable by Sublessor
to Master Lessor under the Lease for the extended term of the Lease ("Master
Lease Rental"). The Master Lease Rental shall be determined by Sublessee (if
Master Lessor permits and, in any event, with the participation of Sublessor)
and Master Lessor in accordance with the provisions of Section 2.5(B) of the
Lease. Sublessee and Sublessor shall keep each other apprised of all
significant developments in the rent negotiations with Master Lessor, and if the
monthly rental is determined by arbitration pursuant to Section 2.5(B) of the
Lease, Sublessee shall have the right to designate the qualified real estate
appraiser to be selected by Sublessor, subject to Sublessor's prior written
consent, which shall not be unreasonably withheld or delayed. During the
Renewal Term, Sublessee shall also remain obligated to pay to Sublessor or to
the appropriate party therefor all other amounts payable by Sublessor to Master
Lessor under the Lease, including, without limitation, all amounts payable under
Sections 5.1, 10.5 and 11.4 and Article 15 of the Lease.
3. Indemnity. Sublessee acknowledges and agrees that Sublessor would not
---------
exercise Sublessor's option to extend the term of the Lease unless Sublessor
were obligated to do so under Section 1 above, and that Sublessor's exercise of
such option to extend will expose Sublessor to substantial liabilities, costs
and expenses, including, without limitation, rental, real property taxes,
insurance premiums, operating expenses and repair and maintenance obligations
under the Lease during the extended term of the Lease. Accordingly, in
consideration for Sublessor's entering into this Amendment, Sublessee agrees to
indemnify, defend (with legal counsel acceptable to Sublessor) and hold harmless
Sublessor, its officers, directors, shareholders, employees, agents,
contractors, successors and assigns from and against any and all losses, costs,
claims, damages, liabilities and causes of action (including, without
limitation, attorneys' fees and costs and expert witness and consultants' fees
and costs) incurred by Sublessor and arising out of or in any way connected with
the extension of the term of the Lease beyond its September 30, 1998 expiration
date. Sublessee's indemnification obligations under this Section 3 shall
expressly extend to all obligations of Sublessor under the Lease attributable to
the extended term of the Lease, and to all claims and liabilities asserted
against Sublessor with respect to the Demised Premises (including, without
limitation, claims or liabilities relating to Hazardous Materials) attributable
to the extended term of the Lease, other than those claims and liabilities due
to the gross negligence or willful misconduct of Sublessor or Master Lessor.
4. Limitation on Amendment. Except as modified by this Amendment, all
of the terms and provisions of the Sublease shall remain in full force and
effect and are hereby ratified and confirmed.
2
<PAGE>
5. Condition. This Amendment and Sublessor's obligations hereunder
---------
are expressly conditioned upon the parties' obtaining Master Lessor's written
consent to this Amendment in a form acceptable to Master Lessor, Sublessor and
Sublessee. If Master Lessor shall fail to provide such written consent to
Sublessor on or before March 30, 1998, Sublessor shall have the right to
terminate this Amendment at any time thereafter by written notice to Sublessee,
provided that Master Lessor has not yet given such written consent to Sublessor.
If Sublessor shall so terminate this Sublease, Sublessee's exercise of its
option to extend the Sublease Term pursuant to Section 1 above shall be of no
force or effect, and this Sublease shall expire at the end of the Sublease Term.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
as of the day and year first above written.
SUBLESSOR: RAYCHEM CORPORATION,
a Delaware corporation
By /s/ Spencer Leslie
-------------------------------
Title Director, Site Services
---------------------------
SUBLESSEE: MEMRY CORPORATION,
a Delaware corporation
By /s/ James G. Binch
------------------------------
Title President and CEO
--------------------------
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MEMRY
CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS TO ITS ANNUAL REPORT ON FORM
19KSB FOR THE YEAR ENDED JUNE 30, 1997. IT IS QUALIFIED IN ITS ENTIRETY BY
REGFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1998
<PERIOD-START> JUL-01-1996 JUL-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1998
<CASH> 25 1189
<SECURITIES> 0 0
<RECEIVABLES> 2419 3859
<ALLOWANCES> 0 0
<INVENTORY> 1664 2336
<CURRENT-ASSETS> 5413 7656
<PP&E> 4109 4593
<DEPRECIATION> 1344 1876
<TOTAL-ASSETS> 11152 13,085
<CURRENT-LIABILITIES> 5428 2361
<BONDS> 0 0
0 0
0 0
<COMMON> 170 199
<OTHER-SE> 5511 9926
<TOTAL-LIABILITY-AND-EQUITY> 11152 13085
<SALES> 11290 18847
<TOTAL-REVENUES> 11545 19077
<CGS> 6305 9266
<TOTAL-COSTS> 6517 9453
<OTHER-EXPENSES> 5023 6241
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 275 163
<INCOME-PRETAX> (260) 3236
<INCOME-TAX> 0 160
<INCOME-CONTINUING> (260) 3076
<DISCONTINUED> (751) (151)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1011) 2925
<EPS-PRIMARY> 0.06 0.16
<EPS-DILUTED> 0.06 0.14
</TABLE>
