<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30,1998
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to___________
Commission file number 0-11625
------------------------------
MICROFLUIDICS INTERNATIONAL CORPORATION
---------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2793022
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
30 Ossipee Road, P.O. Box 9101, Newton, Massachusetts 02164
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(617)969-5452
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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 [_]
Registrant had 6,056,983 shares of Common Stock, par value $.01 per share,
outstanding on November 12, 1998.
Page 1
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MICROFLUIDICS INTERNATIONAL CORPORATION
INDEX PAGE
----- NUMBER
------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of 3
September 30, 1998 (unaudited) and
December 31, 1997
Consolidated Statements of Operations
(unaudited) for the three and nine months
ended September 30, 1998 and September 30, 1997 4
Consolidated Statements of Cash Flows
(unaudited) for the nine months ended
September 30, 1998 and September 30, 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 9
ITEM 6. Exhibits and Reports on Form 8-K 9
Signatures 10
Exhibit Index 11
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 995,988 $ 4,083,214
Marketable securities 45,024 55,638
Accounts receivable (less
allowance for doubtful accounts
of $80,030 and $40,000 at September
30,1998 and December 31, 1997) 2,109,092 1,396,088
Other receivables 46,686 140,989
Inventory 4,752,879 2,436,938
Prepaid expense 221,533 26,764
------------ ------------
Total current assets 8,171,202 8,139,631
Equipment and leasehold
improvements, at cost
Furniture, fixtures and office equipment 442,897 335,467
Machinery and equipment 770,515 261,592
Leasehold improvements 304,843 125,322
------------ ------------
1,518,255 722,381
Less: accumulated depreciation
and amortization (647,177) (570,555)
------------ ------------
871,078 151,826
Goodwill (net of accumulated
amortization of $50,000 at
September 30, 1998) 6,061,952
Patents, licenses and other
intangible assets (net of
accumulated amortization of
$412,489 at September 30, 1998 and
$379,549 at December 31, 1997) 134,191 167,131
Deferred Income Taxes 413,630 413,630
------------ ------------
Total assets $ 15,652,053 $ 8,872,218
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other
accrued expenses $ 1,227,683 $ 939,796
Accrued compensation 199,907 113,563
Customer advances 145,114 280,716
Corporate income taxes 17,545
Current portion of long term debt 75,000
Total current liabilities 1,665,249 1,334,075
Long term debt,
net of current portion 725,000
Line Of credit 3,947,899
Stockholders' equity
Common Stock, par value $.01 per
share, 20,000,000 shares authorized;
6,056,983 and 5,136,804 shares issued
and outstanding at September 30,
1998 and at December 31,1997,
respectively 60,570 51,368
Additional paid-in-capital 12,491,423 10,442,840
Accumulated deficit (2,631,768) (2,360,359)
Unrealized appreciation on
marketable securities 45,024 55,638
Less: Treasury Stock, at cost,
220,719 shares at
September 30, 1998 and December
31, 1997 respectively (651,344) (651,344)
------------ ------------
Total stockholders' equity 9,313,905 7,538,143
------------ ------------
Total liabilities and
stockholders' equity $ 15,652,053 $ 8,872,218
============ ============
</TABLE>
(See notes to consolidated financial statements)
Page 3
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MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 2,306,310 $ 1,762,959 $ 5,855,284 $ 5,227,782
Cost of goods sold 1,319,856 738,136 3,055,848 2,363,904
----------- ----------- ----------- -----------
Gross profit on
revenues 986,454 1,024,823 2,799,436 2,863,878
Operating expenses:
Research and
development 271,126 122,757 616,029 352,739
Selling, general and
administrative 1,024,758 754,049 2,479,884 2,179,481
Amortization of Goodwill 50,000 50,000
----------- ----------- ----------- -----------
Total operating
expenses 1,345,884 876,806 3,145,913 2,532,220
Income (loss) from
operations (359,430) 148,017 (346,477) 331,658
Interest income 36,376 45,074 115,972 110,984
Interest expense 40,904 40,904
Other income 12,503 37,509
Gain on sale of
marketable securities 91,863 91,863
----------- -----------
Net income(loss) $ (363,958) $ 297,457 $ (271,409) $ 572,014
=========== =========== =========== ===========
Income (loss) per Common Share:
Basic:
Average shares outstanding 5,032,189 4,919,480 5,129,015 4,918,196
Net income (loss) per share $ (.07) $ .06 $ (.05) $ .12
=========== =========== =========== ===========
Diluted:
Average shares outstanding 5,032,189 5,025,072 5,129,015 5,023,788
Net income(loss) per share $ (.07) $ .06 $ (.05) $ .11
=========== =========== =========== ===========
</TABLE>
(See notes to consolidated financial statements)
Page 4
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MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ (271,409) $ 572,014
Reconciliation of net income to cash provided by
operating activities:
Depreciation and amortization 161,651 77,940
Issuance of common stock employee compensation -0- 30,000
Bad debt expense 23,000 22,500
Effects of changes in operating working capital items:
(Increase) decrease in trade and other
receivables 636,912 (101,326)
(Increase) decrease in inventories 464,485 (3,912)
(Increase) decrease in prepaid expenses (105,620) (28,890)
Increase (decrease) in current liabilities (1,672,395) 406,700
----------- -----------
Net cash (used in) provided by operating activities (763,376) 975,026
Cash flows used in investing activities:
Excess of cost over assets purchased (Goodwill) (3,286,952)
Purchase of capital equipment (63,517) (54,568)
Business assets acquired net of cash (3,102,216)
----------- -----------
Net cash used in investing activities (6,452,685) (54,568)
Cash flows used in financing activities:
Proceeds from borrowings to finance acquisition 4,096,050
Issuance of common stock option agreements 32,785 12,577
Treasury stock purchased (55,390)
----------- -----------
Net cash (used in) from financing activities 4,128,835 (42,813)
Net decrease in cash 3,087,226 877,645
Cash and cash equivalents at beginning of
period 4,083,214 2,786,554
----------- -----------
Cash and cash equivalents at end of period $ 995,988 $ 3,664,199
=========== ===========
Supplemental Cash Flow:
Assets acquired in exchange for notes
and common stock $ 2,825,000
===========
</TABLE>
(See notes to consolidated financial statements)
Page 5
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MICROFLUIDICS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation
have been included. The results of operations for the nine months ended
September 30, 1998 and 1997 are not necessarily indicative of the results
to be expected for the full year. For further information, refer to the
consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which the Company adopted in the fourth quarter of 1997, as
required. Basic Earnings Per Share (EPS) is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other obligations to issue
common stock were exercised or converted into common stock or resulted in
the issuance of common stock. In accordance with the standard, 1997 EPS
data has been restated to conform to SFAS No. 128.
3. INVENTORY
The components of inventories on the following dates were:
September 30, 1998 December 31, 1997
Raw Material $2,181,525 $1,277,094
Work in Progress 1,221,470 649,946
Finished Goods 1,349,884 509,898
---------- ----------
Total $4,752,879 $2,436,938
========== ==========
4. TAXES
For 1997, the Company utilized net operating loss carryforwards to
substantially offset taxes computed at statutory rates. At December 31,
1997, the Company had available approximately $2.1 million in Federal Net
Operating Loss carryforwards to offset future taxable income. The Company
established a valuation allowance against a portion of the deferred tax
asset due to the uncertainty of earning sufficient taxable income to
realize the full benefit of these assets.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information".
SFAS No. 131 establishes standards for reporting annual and interim
operating segment information and is effective for the Company's 1998
annual financial statements and interim reporting beginning in 1999. The
Company has reviewed this new standard and has determined that it has one
business segment, and is reviewing the additional disclosure requirements
of this statement.
6. ACQUISITION OF ASSETS
On August 14, 1998, (the "Closing Date"), the Company purchased
substantially all of the assets (the "Transferred Assets") and assumed
certain liabilities of Epworth Manufacturing Company of South Haven,
Michigan ("Epworth") and Morehouse-COWLES, Inc. of Fullerton, California
("Morehouse" and together with Epworth, the "Sellers") pursuant to an Asset
Purchase Agreement (the "Agreement") dated as of June 19, 1998 by and among
the Company, Epworth and Morehouse. Messrs. J.B. Jennings and Bret A. Lewis
were the sole stockholders of both Epworth and Morehouse (the"Principals").
Epworth and Morehouse each manufactures and distributes a product line of
crushing/grinding, mixing, dissolving and dispersion systems for solid or
solids materials processing that are marketed together under the EMCO
U.S.A. trade name. The Company intends to continue the operations of
Epworth and Morehouse, each as a separate division of the Company, and to
continue the use of the Transferred Assets to manufacture and distribute
crushing/grinding, mixing, dissolving and dispersion systems. The
Transferred Assets included cash and cash equivalents, accounts and notes
receivables, inventories, machinery and equipment, intellectual property
rights, furniture and fixtures and leasehold interests and improvements.
In accordance with the Agreement, the Company paid or delivered to the
Sellers the following as consideration for the purchase price of the
Transferred Assets (the "Purchase Price"): (i) $5,508,480 in cash, (ii) two
subordinated promissory notes in the aggregate principal amount of $800,000
and (iii) 900,000 shares of the Company's restricted common stock, $.01 par
value per share, subject to the restrictions set forth in a Stockholders
agreement among the Company and the Principals dated August 14, 1998 (the
Stockholders Agreement"). The Company also incurred approximately $500,000
in expenses. In addition, the Company assumed approximately $1,930,000 of
accounts payable and accrued liabilities set forth on the Sellers' balance
sheets, certain of which were also paid on the Closing Date. The
consideration paid by the Company for the Transferred Assets was determined
through arms-length negotiations between the Company and the Sellers.
The Company paid $1,897,509 from its working capital and borrowed
$4,096,050 from Comerica Bank, its primary lender, in order to finance the
purchase and payoff certain of the assumed liabilities. The revolving loan,
security and ancillary agreements with Comerica Bank (the "Revolving Loan
Agreement") provide up to $5,000,000 in loans with monthly interest
payments and the outstanding principal amount due on September 1, 2001. The
line of credit expires on September 1, 2001. The current outstanding
principal balance under the Revolving Loan Agreement is $3,947,899 and
bears interest at a rate of 7.625% per annum.
If the acquisition had occurred as of January 1, 1998, pro-forma
information for the nine months ended September 30, 1998 and 1997 would be
as follows:
Nine months ended
September 30
------------
1998 1997
---- ----
Revenues $11,688,254 $13,826,498
=========== ===========
Income (loss) $(1,146,575) $ 193,391
=========== ===========
Earnings (loss) per share:
Basic $ (.19) $ .03
=========== ===========
Diluted $ (.19) $ .03
=========== ===========
7. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Comprehensive income for the nine months
ended September 30, 1998 and 1997 are as follows:
Nine months ended
September 30
------------
1998 1997
---- ----
Other comprehensive income:
Unrealized gains (losses) on securities $(10,614) $16,416
------ ------
Other comprehensive income $(10,614) $16,416
====== ======
The accumulated other comprehensive income balance is as follows:
Unrealized loss
---------------
on Securities
-------------
Beginning balance $55,638
Current-period change (10,614)
------
Ending balance $45,024
======
These amounts have not been tax affected due to the availability of Net
Operating Loss carryovers to offset the unrealized gains.
Page 6
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MICROFLUIDICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. RESULTS OF OPERATIONS
Total revenues for the three months ended September 30, 1998 were $2,306,310, as
compared to revenues of $1,762,959 for the three months ended September 30,
1997, representing an increase of $543,351, or 30.8%. For the nine months ended
September 30, 1998, revenues increased 12.0%, to $5,855,284 as compared to
revenues of $5,227,782 for the nine months ended September 30, 1997. The
increases during both of these periods were largely due to the $1,200,000 in
additional revenue generated by the Company's Epworth and Morehouse divisions
during the third quarter, offset by a decrease in sales by the previously sole
operating division of the Company ($660,000 for the third quarter and $580,000
for the nine months ended September 30, 1998).
For the previously sole operating division of the Company, North American sales
for the three months ended September 30, 1998 increased to $979,248, or 9.0% as
compared to North American sales of $898,085 for the three months ended
September 30, 1997. This increase in North American sales was principally due to
an increase in the sale of machines compared to the three months ended September
30, 1997. For the nine months ended September 30, 1998, North American sales
increased to $3,237,052, or 6.0% as compared to North American sales of
$3,055,098 for the nine months ended September 30, 1997. This increase in North
American sales is principally due to an increase in machine sales of
approximately $308,000, offset by a decrease in spare part sales of
approximately $90,000. Foreign sales were $123,756 for the three months ended
September 30, 1998 compared to $864,874 for the three months ended September 30,
1997, a decrease of approximately $741,000, or 86.0%. This decrease in foreign
sales was principally due to a decrease in the sale of machines of approximately
$760,000 compared to the three months ended September 30, 1997. Foreign sales
for the nine months ended September 30, 1998 decreased to $1,409,926, or 35.1%
from $2,172,604 for the nine months ended September 30, 1997. This decrease in
foreign sales is due to a decrease in sales of machinery of approximately
$849,000.
Cost of goods sold for the three months ended September 30, 1998 was $1,319,856,
or 57.2% of revenue, compared to $738,136, or 41.9% of revenue, for the three
months ended September 30, 1997. For the nine months ended September 30, 1998,
cost of goods sold increased to $3,055,848, or 52.1% of revenue as compared to
$2,363,904, or 45.2% of revenue for the nine months ended September 30, 1997.
The increase in cost of goods sold in absolute dollars both for the three and
nine months ended September 30, 1998, reflects the increase in sales generated
by the new Epworth and Morehouse operating divisions of the Company, offset by a
decrease in sales of machines by the previously sole operating division of the
Company. For the previously sole operating division of the Company, for the
three month period ended September 30, 1998, cost of goods sold was $489,036, or
44.3% of sales, compared to $738,136, or 41.8% of sales, for the three months
ended September 30, 1997. For the nine months ended September 30, 1998, cost of
goods sold was $2,225,028, or 47.9% of sales, compared to $2,363,904,or 45.2% of
sales, for the nine months ended September 30, 1997. The decrease in cost of
goods sold was primarily due to reduced foreign sales and spare part sales.
The Company's three major product lines have different profit margins, as well
as multiple profit margins within each product line. In the course of the
periods compared, there may be significant changes in the cost of revenues as a
percentage of revenue depending on the mix of product sold. Also, the cost of
sales as a percent of revenue will differ between laboratory and pilot plant
units sold, due to the difference in costs between air driven and electric-
hydraulic units.
Total operating expenses for the three months ended September 30, 1998 were
$1,295,884, or 56.2% of revenue, as compared to $876,806, or 49.7% of revenue,
for the three months ended September 30, 1997, which is an increase of $419,078,
or 49.7%. Operating expenses for the nine months ended September 30, 1998 were
$3,095,913, or 52.9% of revenue, as compared to $2,532,220, or 48.4% of revenue,
for the nine months ended September 30, 1997, an increase of $563,693, or 48.4%.
Research and development expenses for the three months ended September 30, 1998
were $271,126 compared to $122,757 for the three months ended September 30,
1997, an increase of $148,369, or 121%. Excluding research and development
expenses attributable to the new Epworth and Morehouse operating divisions of
the Company that approximated $85,000, the increase in research and development
expenses was primarily due to an increase in payroll costs of approximately
$28,000, and a decrease in grant reimbursement funds of approximately $46,000.
For the nine months ended September 30, 1998, research and development costs
were $616,029, compared to $352,739 for the nine months ended September 30,
1997, an increase of $263,290, or 74.6%. Excluding research and development
expenses attributable to the new Epworth and Morehouse operating divisions of
the Company that approximated $85,000, the increase in research and development
expenses was primarily due to an increase in payroll costs of approximately
$82,000, and a decrease in grant reimbursement funds of approximately $45,000.
Selling, general and administrative expenses for the three months ended
September 30, 1998 increased approximately $270,000, from $754,049 to
$1,024,758, or 35.9%, compared to the three months ended September 30, 1997. For
the nine months ended September 30, 1998, selling, general and administrative
expenses increased approximately $300,000, from $2,179,481 to $2,479,884, or
13.8%. For the three months ended September 30, 1998, excluding selling expenses
of approximately $165,000 attributable to the new Epworth and Morehouse
operating divisions of the Company, selling expenses increased by approximately
$34,000, from $418,550 to $452,735, due to an increase in payroll and related
costs of approximately $36,000. For the nine months ended September 30, 1998,
selling expenses, compared to the nine months ended September 30, 1997,
increased to $1,315,655 from $1,248,508, or $67,147, due principally to an
increase in payroll costs of approximately $59,000. For the three months ended
September 30, 1998, general and administrative expenses, compared to the three
months ended September 30, 1997 increased by approximately $71,000, from
$335,499 to $406,960. Excluding expenses attributable to the new Epworth and
Morehouse operating divisions of the Company of approximately $164,000 for the
three months ended September 30, 1998, general and administrative expenses
decreased approximately $92,000,for the three months ended September 30, 1998,
principally due to a decrease in professional fees of approximately $31,000, and
the capitalization of previously expensed corporate acquisition costs of
approximately $28,000 to goodwill in connection with the acquisition of the new
Epworth and Morehouse operating divisions of the Company. General and
administrative expenses decreased by approximately $104,000 to $835,636 for the
nine months ended September 30, 1998 as compared to $940,135 for the nine months
ended September 30, 1997. The principal reasons for the decrease were: a
decrease in accounting and legal fees of approximately $50,000 and the
capitalization of previously expensed corporate acquisition costs of
approximately $42,000.
Interest income for the three months ended September 30, 1998 decreased to
$36,376 compared to $45,074 for the three months ended September 30, 1997, a
decrease of $8,698 or 19.3%. Interest income increased for the nine months ended
September 30, 1998 to $115,972 compared to $110,984, for the nine months ended
September 30, 1997, an increase of $4,988, or 4.5%. The decrease in the three
months ended and the increase for the nine months ended September 30, 1998 were
due to the amount of cash available to invest for each period.
The Company realized a gain on the sale of a portion of the Company's holdings
in PolyMedica Industries, Inc. in the amount of $91,863 for the three month
period ended September 30, 1997.
The Company received other income of $12,503 and $37,509 for the three and nine
months ended September 30, 1997, respectively. The other income resulted from
royalty income of $4,168 per month due to the sale of the Company's Dermasome(R)
product line in December, 1995. The Company had a sales backlog of $1,021,884
and $1,758,874 at September 30, 1998 and September 30, 1997, respectively,
consisting of purchase commitments for each divisions' line of equipment.
Page 7
<PAGE>
2. LIQUIDITY AND CAPITAL RESOURCES
Prior to the acquisition of the Epworth and Morehouse divisions, the Company
had financed its operations primarily through the use of cash and cash
equivalents on hand, and cash flow from operations. The Company used cash of
$763,376 and generated cash of $975,026 from operations for the nine months
ended September 30, 1998 and 1997, respectively. For the first nine months of
1998, the Company's principal operating cash requirements were to fund its net
loss and decreases in current liabilities and an increase in prepaid expenses,
offset by decreases in inventory and trade and other receivables. For the first
nine months of 1997, this amount was principally the result of income from
operations and an increase in current liabilities, partially offset by an
increase in trade and other receivables and prepaid expenses.
The Company utilized $6,452,685 and $54,568 for investing activities for the
nine months ended September 30, 1998 and 1997, respectively. Net cash used for
investing activities for the nine months ended September 30, 1998 included the
excess cost of assets purchased in the acquisition of the Epworth and Morehouse
divisions over their fair value, business assets acquired net of cash, as well
as the purchase of capital equipment. Net cash used for investing activities for
the nine months ended September 30, 1997 consisted of the purchase of capital
equipment. As of September 30, 1998, the Company had no material commitments for
capital expenditures.
The Company generated cash of $4,128,835 for the nine months ended September 30,
1998, consisting of proceeds from borrowings to finance the acquisition of the
Epworth and Morehouse divisions. The Company utilized cash of $42,813 for the
nine months ended September 30, 1997, composed primarily of the purchase of
treasury stock, partially offset by the issuance of Common Stock pursuant to the
exercise of stock options pursuant to the Company's employee stock purchase plan
and stock option plan.
As of September 30, 1998, the Company had approximately $995,988 in cash and
cash equivalents, compared to $4,083,214 as of December 30, 1997. This decrease
primarily resulted from the Company's purchase of the Epworth and Morehouse
divisions. The Company maintains a line of credit with Comerica Bank. The line
of credit facility provides for maximum borrowing of $5,000,000. As of September
30, 1998 and November 13, 1998 the Company had borrowings of $3,947,899 and
$4,123,426 respectively.
Assuming that there is no significant change in the Company's business, the
Company believes that cash flows from operations, together with existing cash
balances, will be sufficient to meet its working capital requirements for at
least the next twelve months.
In view of the fact that the above financial results reflect the combined
operations of the Company for the period between August 14, 1998 and September
30, 1998 and that the Company issued 900,000 shares of Common Stock in
connection with the acquisition of the Epworth and Morehouse divisions, the
Company believes that period-to-period comparisons of operating results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
3. POSSIBLE NASDAQ DELISTING
The Company's Common Stock is currently listed on the Nasdaq National
Market (the "National Market") under the symbol "MFIC." The Company has been
notified by the National Market that, as of October 19, 1998, the Company was
not in compliance with the National Market requirements for the continued
listing of its Common Stock because the public float of the Common Stock was
less than $5,000,000 for more than thirty consecutive days. Nasdaq calculates
the market value of a company's common stock by multiplying the closing bid
price of the stock by the number of shares held by non-affiliates. The Company
estimates that 3,886,673 shares are currently held by non-affiliates. The notice
from the National Market further stated that the Company's Common Stock would be
delisted as of January 18, 1999 if the public float was not $5,000,000 or more
for a period of ten consecutive trading days during the ninety-day period from
October 19, 1998 to January 17, 1999. As of November 16, 1998, the Company had
not satisfied this public float requirement. Further, as of September 30, 1998,
the Company fell below another of the National Market's continued listing
requirement; its net tangible assets (total assets minus goodwill and total
liabilities) had fallen below $4,000,000 to $3,251,953. In the event that the
Company is unable to meet the National Market continued listing requirements,
the Company intends to request a hearing before the National Market to delay or
avoid the delisting of its Common Stock. However, there can be no assurance that
the Common Stock will not be delisted by the National Market. In the event that
the Common Stock is delisted by the National Market, the Company will seek to
have the Common Stock listed on the Nasdaq SmallCap Market (the "SmallCap
Market"). However, since the Company only meets the continued listing
requirements of the SmallCap Market and does not meet the initial listing
requirements, there can be no assurance that Nasdaq will permit the Common Stock
to be listed on the SmallCap Market. If the Company cannot list its Common Stock
on the SmallCap Market, the Common Stock will trade in the over-the-counter
markets. The liquidity of such securities may be impaired not only in the number
of shares that could be bought or sold, but also through delays in the timing of
transactions, reductions in securities analysts' and media coverage of the
Company, and lower prices than might otherwise be attained.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1997 the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for reporting annual and interim operating segment
information and is effective for the Company's 1998 annual financial statements
and interim reporting beginning in 1999. The Company has reviewed this new
standard and has determined that it has one business segment, and is reviewing
the additional disclosure requirements of this statement.
5. YEAR 2000 DISCLOSURE
The "Year 2000 Problem" arose because many existing computer programs use only
the last two digits to refer to a year. Therefore, these computer programs may
recognize a year that ends in "00" as the Year 1900 rather than the Year 2000.
This could result in a significant disruption of operations and an inability to
process certain transactions.
Strategic Plan
The Company has recently been engaged in an assessment of its internal
information technology systems. The Company contacted providers of its internal
technology systems and it was determined that, because its computer applications
use four digits to identify a year in the field date, the Company's information
technology systems were in fact internally compliant with Year 2000
requirements. The Company is also currently reviewing proposals for a full
compliance audit of the Company's network system and its components. The
Company anticipates that such audit will occur in January 1999. If any Year
2000 problems arise, the Company expects to implement a plan by the end of
January 1999 and to begin to fix such problems during the first and second
quarters of 1999, with a view to correcting all Year 2000 problems by the end of
the second quarter of 1999.
With respect to the Company's non-information technology systems, the Company is
aware that some of the equipment that the Company leases may not be Year 2000
compliant. While it is understood by the Company that the potential effect on
results of operations could be serious and could have a material adverse affect
on the Company's business or financial condition, at this time management has
not determined the entire potential level of risk associated with its non-
compliant non-information technology systems and has not yet formulated a plan
for remediating such problems.
In addition, the Company has developed a strategic plan to estimate the
potential risks related to third parties with whom it has relationships. The
third parties include financial institutions, vendors, payroll service
providers, distributors, customers, and equipment manufacturers. If any of
these third parties encounter Year 2000 problems, it could have a potentially
significant outcome on the ability of the Company to effectively continue its
normal daily operations.
The initial stage to be immediately undertaken by the Company will include
distribution of inquiry letters to its most significant third parties, followed
by a subsequent internal evaluation of the responses received. Upon learning
that certain third parties are not Year 2000 compliant, the Company may be
required to manually process transactions, delay vendor payments, and/or issue
manual checks to employees in place of direct deposits. These processes, if
necessary, would be a part of the second stage - implementation, in which the
Company would correct and/or replace any vendors or vendor software that is not
Year 2000 compliant, as soon as it is feasible. The Company anticipates
completing this initial stage by the end of the first quarter of 1999.
Costs
There have been no historical costs incurred to date by the Company related to
Year 2000 compliance. As stated above, the Company expects to complete its Year
2000 strategic plan by the end of the second quarter of 1999. The total cost of
implementing the plan is not expected to exceed $25,000. Any costs associated
with such plan will be incorporated into the Company's 1999 budgeting process.
In addition, while the Company cannot predict what impact the Year 2000 problem
may have on third parties, it does not currently believe that it will incur
material costs in the implementation stage of resolving potential Year 2000
problems of third parties with whom it interacts.
Risks
Until the initial stage of the Company's strategic plan is complete, the Company
cannot accurately assess the potential risks associated with non-compliance of
its non-information technology systems or external third parties. While it is
understood by the Company that the potential effect on results of operations
could be serious and could have a material adverse affect on the Company's
business or financial condition, at this time management has not determined the
entire potential level of risk.
Contingency Plan
At the present time, a contingency plan has not been developed. The Company
will continue to monitor the need for a contingency plan based on the results of
its Year 2000 compliance strategic plan.
6. BUSINESS OUTLOOK
The Company believes that this report may contain forward-looking statements
that are subject to certain risks and uncertainties. These forward-looking
statements include statements regarding the Company's liquidity, the possibility
of the Company's Common Stock being delisted by Nasdaq and the Company's Year
2000 readiness. Such statements are based on management's current expectations
and are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. Such factors and uncertainties include, but are not limited to, the
uncertainty that the performance advantages of the Microfluidizer equipment will
be realized commercially or that a commercial market for Microfluidizer
equipment will continue to develop; the dependence by the Company on key
customers; the loss of the services of one or more of the Company's key
employees, which could have a material adverse impact on the Company; the
development of competing or superior technologies and products from other
manufacturers, many of which have substantially greater financial, technical and
other resources than the Company; the cyclical nature of the materials
processing industry, which has historically negatively affected the Company's
sales of Microfluidizer equipment during industry downturns and which could do
so in the future; the availability of additional capital to fund expansion on
acceptable terms, if at all; and general economic conditions.
Page 8
<PAGE>
MICROFLUIDICS INTERNATIONAL CORPORATION
PART II- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 14, 1998, the Company purchased substantially all of the
assets of Epworth Manufacturing Company and Morehouse-COWLES, Inc. As part of
the consideration paid by the Company in connection with the purchase, the
Company issued and delivered 900,000 shares of its restricted Common Stock, $.01
par value per share, to J.B. Jennings and Bret A. Lewis, the sole stockholders
of Epworth Manufacturing Company and Morehouse-COWLES, Inc. Such sale was made
in reliance upon an exemption from the registration provisions of the Securities
Act of 1933, as amended, set forth in Section 4(2) thereof relative to sales by
an issuer not involving any public offering or the rules and regulations
thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1
Revolving Credit Loan Agreement between Comerica Bank and the Company
dated August 12, 1998.
Exhibit 11 Statement regarding computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On August 27, 1998, the Company filed a Form 8-K announcing the
purchase of substantially all of the assets of two established U.S.
manufacturing firms, Epworth Manufacturing Company of South Haven,
Michigan, and Morehouse-COWLES, Inc. of Fullerton, California, as of
August 14, 1998.
On September 11, 1998, the Company filed Amendment No. 1 on Form 8-K/A
amending its filing of August 27, 1998.
On October 28, 1998, the Company filed Amendment No. 2 on Form 8-K/A
amending the previous filings of August 27, 1998, and September 11,
1998 which included pro forma financial statements required in
connection with the Company's acquisition of substantially all of the
assets of Epworth Manufacturing Company and Morehouse-COWLES, Inc.
Page 9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROFLUIDICS INTERNATIONAL CORPORATION
/s/ Michael A. Lento
----------------------
Michael A. Lento
President and Treasurer
(Principal Financial and Accounting Officer)
Date: November 16, 1998
Page 10
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
10.1 Revolving Credit Loan Agreement between Comerica
Bank and the Company dated August 12, 1998.
11 Statement regarding computation of
per share earnings.
27 Financial Data Schedule
<PAGE>
Exhibit 10.1
REVOLVING CREDIT LOAN AGREEMENT
-------------------------------
THIS REVOLVING CREDIT LOAN AGREEMENT, dated as of August 12, 1998 (as
amended, the "Agreement"), is by and between MICROFLUIDICS INTERNATIONAL
CORPORATION, a Delaware corporation (the "Company") and COMERICA BANK, a
Michigan banking corporation (the "Bank").
INTRODUCTION
------------
The Company desires to obtain a credit facility providing for a revolving
line of credit in the aggregate principal amount of Five Million Dollars
($5,000,000) to refinance and replace Company's existing credit facilities, to
provide funds for its working capital needs, to fund the purchase of the assets
of EMCO, and for general corporate purposes, and the Bank is willing to
establish such credit facilities in favor of the Company on the terms and
conditions herein set forth.
ARTICLE I
DEFINITIONS
-----------
1.1 Certain Definitions. As used herein the following terms shall have
-------------------
the following respective meanings:
"Accounts," "Chattel Paper," "Documents," "Equipment," "Fixtures," "General
-------- ------------- --------- --------- -------- -------
Intangibles," "Goods," "Instruments" and "Inventory" shall have the meanings
- - ----------- ----- ----------- ---------
assigned to them in the UCC on the date of this Agreement.
"Accounts Receivable" shall mean and include all Accounts, Chattel Paper
-------------------
and General Intangibles (including, but not limited to tax refunds, trade names,
trade styles and goodwill, trade marks, copyrights and patents, and applications
therefor, trade and proprietary secrets, formulae, designs, blueprints and
plans, customer lists, literary rights, licenses and permits, receivables,
insurance proceeds, beneficial interests in trusts and minute books and other
books and records) now owned or hereafter acquired by Company.
"Acquisition" shall mean the purchase of substantially all of the assets of
-----------
EMCO by the Company.
"Acquisition Documents" shall mean the Asset Purchase Agreement, Seller's
---------------------
Subordinated Note and the other documents relating to the Acquisition.
"Affiliate" shall mean, when used with respect to any person, any other
---------
person, which directly or indirectly, controls or is controlled by or is under
common control with such person. For purposes of this definition, "control"
(including the correlative meanings of the terms "controlled by" and "under
common control with"), with respect to any person, shall mean possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such person, whether through the ownership of voting
securities or by contract or otherwise.
<PAGE>
"Agreement" shall mean this Revolving Credit Loan Agreement.
---------
"Applicable Interest Period" shall mean, with respect to any Eurodollar
--------------------------
Loan, the Eurodollar Interest Period selected by the Company in any Notice of
Borrowing.
"Applicable Interest Rate" shall mean the Eurodollar Rate, the Prime Rate,
------------------------
as selected by the Company from time to time or as otherwise determined in
accordance with the terms and conditions of this Agreement.
"Applicable Lending Office" shall mean, with respect to any Loan made by
-------------------------
the Bank or with respect to the Bank's Commitment, the office of the Bank or of
any Affiliate of the Bank located at the address specified for the Bank on the
signature pages hereof (or identified on the signature pages hereof as the
lending office for a particular type of Loan) or any other office or Affiliates
of the Bank or of any Affiliate of the Bank hereafter selected and notified to
the Company and the Bank as an Applicable Lending Office for a particular type
of Loan by the Bank.
"Applicable Margin" shall mean that number of percentage points to be taken
-----------------
into account in computing the interest rate that accrues on the Loans and may be
designated as the "Prime Margin" or the "Eurodollar Margin," as applicable. The
Applicable Margin shall mean the applicable percentage per annum, as determined
by reference to the following table:
Prime Margin Eurodollar Margin
------------ -----------------
a. For the first 90 days
after the Effective Date -7/8% 2.0%
b. From the 91st day after
the Effective Date until
the Termination Date -5/8% 2.0%
"Average Daily Outstandings" shall mean, in respect of a particular fiscal
--------------------------
quarter, a dollar amount equal to the average daily amount of principal
Indebtedness outstanding under this Agreement during such applicable fiscal
quarter. Such amount shall be determined as of the Determination Date in
respect of such fiscal quarter, and shall be determined by dividing (a) the sum
of the aggregate principal Indebtedness outstanding under this Agreement as of
the end of each day occurring during such fiscal quarter, by (b) the actual
number of days in such fiscal quarter.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as
---------------
amended, or any successor act or code.
"Borrowing" shall mean the aggregation of Loans of the Bank to be made to
---------
the Company pursuant to Article II on a single date and for a single Eurodollar
Interest Period which Borrowings may be classified for purposes of this
Agreement by reference to the type of Loans comprising the related Borrowing,
e.g., a "Eurodollar Rate Borrowing" is a Borrowing compromised of Eurodollar
Rate Loans.
-2-
<PAGE>
"Business Day" shall mean a day other than a Saturday, Sunday or other day
------------
on which the Bank is not open to the public for carrying on substantially all of
its banking functions, and if the applicable Business Day relates to a
Eurodollar Rate Loan or request therefor, a day which is also a day on which
dealings in Dollar deposits are carried out in the London interbank market.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
----
to time, and the regulations thereunder.
"Collateral" shall mean all property of the Company now or hereafter in the
----------
possession of the Bank or any Affiliate of the Bank (or as to which the Bank or
any Affiliate of the Bank now or hereafter controls possession by documents or
otherwise), all amounts in all deposit or other accounts (including without
limit an account evidenced by a certificate of deposit) of the Company now or
hereafter with the Bank or any Affiliate of the Bank and all of Company's
Accounts, Chattel Paper, Documents, Equipment (other than titled vehicles),
Fixtures, General Intangibles, Goods, Instruments and Inventory, wherever
located and whether now owned or hereafter acquired, together with all
replacements thereof, substitutions therefor, accessions thereto, and all
proceeds and products of all the foregoing and all additional property (real or
personal) of the Company which is now or hereafter subject to a security
interest, mortgage, lien, claim or other encumbrance granted by the Company to,
or in favor of, the Bank.
"Collateral Documents" shall mean the Security Agreement, the Financing
--------------------
Statements and such other documents executed and delivered to the Bank pursuant
to this Agreement granting the Bank a security interest in, mortgage on or lien
upon the Collateral.
"Consolidated" or "consolidated" shall mean, when used with reference to
------------ ------------
any financial term of this Agreement, the aggregate for two or more persons of
the amounts signified by such term for all such persons determined on a
consolidated basis in accordance with generally accepted accounting principles.
"Covenant Compliance Certificate" shall mean a certificate in form of
-------------------------------
Exhibit C to the Agreement, completed in all appropriate respects and executed
by the chief executive or chief financial officer of the Company and setting
forth the Company's computation of its compliance with the financial covenants
contained in Sections 7.5, 7.6, 7.7 and 7.8 of the Agreement.
"Current Assets" shall mean, as of any applicable date of determination,
--------------
all cash, non-affiliated customer receivables, United States government
securities, claims against the United States government, and inventories.
"Current Liabilities" shall mean, as of any applicable date of
-------------------
determination, all liabilities of a person that should be classified as current
in accordance with GAAP, including without limitation the principal amount
outstanding of Revolving Credit Loans, whether or not classified as current
under GAAP.
"Current Maturities" shall mean, as of any applicable date of
------------------
determination, current maturities of long-term Debt as determined in accordance
with GAAP.
-3-
<PAGE>
"Debt" shall mean, as of any applicable date of determination, all items of
----
indebtedness, obligation or liability of a person, whether matured or unmatured,
liquidated or unliquidated, direct or indirect, absolute or contingent, joint or
several, that should be classified as liabilities in accordance with GAAP.
"Debt-to-Worth Ratio" shall mean, as of any applicable time of
-------------------
determination, the ratio of (a) the Company's Debt at such time (excluding
Subordinated Debt), to (b) the Company's Tangible Effective Net Worth at such
time. For purposes of this Agreement, the Company's Debt-to-Worth Ratio shall
be calculated quarterly as of each Determination Date, based upon the quarterly
financial statements of the Company to be furnished to Bank pursuant to the
provisions of Section 7.4.2 of this Agreement for and as of the end of the
relevant fiscal quarter.
"Default" shall mean any of the events or conditions described in
-------
Section 9.1 or 9.2 which might become an Event of Default with notice or lapse
of time or both.
"Determination Date" shall mean the last day of each fiscal quarter.
------------------
"Dollars" and "$" shall mean the lawful money of the United States of
------- -
America.
"EBITDA" shall mean Net Income before interest, income taxes, depreciation
------
and amortization.
"EMCO" shall mean, collectively, Epworth Manufacturing Company, Inc. and
----
Morehouse-COWLES, Inc.
"Effective Date" shall mean the effective date specified in the final
--------------
paragraph of this Agreement.
"Environmental Laws" at any date shall mean all provisions of law, statute,
------------------
ordinances, rules, regulations, judgments, writs, injunctions, decrees, orders,
awards and standards promulgated by the government of the United States of
America or any foreign government or by any state, province, municipality or
other political subdivision thereof or therein or by any court, agency,
instrumentality, regulatory authority or commission of any of the foregoing
concerning the protection of, or regulating the discharge of substances into,
the environment.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, and the regulations thereunder.
"ERISA Affiliate" shall mean, with respect to any person, any trade or
---------------
business (whether or not incorporated) which, together with such person or any
Subsidiary of such person, would be treated as a single employer under
Section 414 of the Code.
"Eurodollar Interest Period" shall mean, with respect to any Eurodollar
--------------------------
Rate Loan, the period commencing on the day such Eurodollar Rate Loan is made
and ending on the date up to twelve (12) months thereafter, as the Company may
elect in the applicable Notice of Borrowing; provided, that
-4-
<PAGE>
(a) any Eurodollar Interest Period which would otherwise end on a day which is
not a Business Day shall be extended to the next succeeding Business Day;
(b) any Eurodollar Interest Period which 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 during which such Eurodollar Interest Period is to end,
shall end on the last Business Day of such calendar month; and (c) no Eurodollar
Interest Period may be elected with respect to any Revolving Credit Loan that
extends beyond the Termination Date.
"Eurodollar Lending Office" shall mean such branch of Bank, domestic or
-------------------------
foreign, as it may hereafter designate as its Eurodollar Lending Office.
"Eurodollar Rate" shall mean, with respect to any Eurodollar Rate Loan and
---------------
the related Eurodollar Interest Period, the per annum rate that is equal to the
sum of:
(a) the Eurodollar Margin, plus
(b) the quotient of:
(i) the per annum interest rate at which the Bank's Eurodollar
Lending Office offers deposits to prime banks in the eurodollar
market in an amount comparable to the relevant Eurodollar Rate
Loan and for a period equal to the relevant Eurodollar Interest
Period at or about 11:00 a.m. (Grand Rapids, Michigan time) (or
as soon thereafter as practical) two (2) Business Days prior to
the first day of such Eurodollar Interest Period;
divided by
(ii) a percentage equal to 100% minus the maximum rate on such date at
which the Bank is required to maintain reserves on "Eurocurrency
Liabilities" as defined in and pursuant to Regulation D of the
Board of Governors of the Federal Reserve System or, if such
regulation or definition is modified, and as long as the Bank is
required to maintain reserves against a category of liabilities
which includes eurodollar deposits or includes a category of
assets which includes Eurodollar Rate Loans, the rate at which
such reserves are required to be maintained on such category.
"Eurodollar Rate Loan" shall mean any Borrowing which bears interest at the
--------------------
Eurodollar Rate.
"Event of Default" shall mean any of the events or conditions described in
----------------
Section 8.
"Federal Funds Rate" shall mean, for any day, the average of the rates on
------------------
overnight federal funds transactions with members of the Federal Reserve System
arranged by federal funds brokers, as published by the Federal Reserve Bank of
New York for such day, or, if such rate is not so published for any day, the
average of the quotations for such rates received by the Bank from three federal
funds brokers of recognized standing selected by the Bank in its discretion from
time to time
-5-
<PAGE>
as the opening federal funds rate paid or payable by the Bank in its regional
federal funds market for overnight borrowings from other banks.
"Financial Statements" shall mean all those balance sheets, earnings
--------------------
statements and statements of cash flow (whether of the Company, any Subsidiary
or otherwise) which have been furnished to the Bank for the purposes of, or in
connection with, this Agreement and the transactions contem plated hereby.
"Financing Statement" shall mean UCC financing statements describing the
-------------------
Bank as secured party and the Company as debtor covering the Collateral and
otherwise in such form, for filing in such jurisdictions and with such filing
offices as the Bank shall reasonably deem necessary or advisable.
"GAAP" shall mean generally accepted accounting principles applied on a
----
basis consistent with that reflected in the Financial Statements as of the date
hereof.
"Indebtedness" shall mean all loans, advances and indebtedness of the
------------
Company to the Bank under this Agreement, together with all other indebtedness,
obligations and liabilities whatsoever of the Company to the Bank, whether
matured or unmatured, liquidated or unliquidated, direct or indirect, absolute
or contingent, joint or several, due or to become due, now existing or hereafter
arising.
"Interest Payment Date" shall mean the first day of each month commencing
---------------------
September 1, 1998.
"Legal Rate" shall mean the maximum interest rate permitted to be paid by
----------
corporate debtors or received by the Bank with respect to the Indebtedness under
applicable law.
"Lien" shall mean any pledge, assignment, hypothecation, mortgage, security
----
interest, deposit arrangement, option, conditional sale or title retaining
contract, sale and leaseback transaction, financing statement filing, lessor's
or lessee's interest under any lease, subordination of any claim or right, or
any other type of lien, charge, encumbrance, preferential arrangement or other
claim or right.
"Multiemployer Plan" shall mean any "multiemployer plan" as defined in
------------------
Section 4001(a)(3) or ERISA or Section 414(f) of the Code.
"Net Income" shall mean the net income (or loss) of a person for any period
----------
determined in accordance with GAAP but excluding in any event:
(i) any one time adjustment resulting from the implementation of a
change in accounting principle prescribed by the Financial Accounting
Standards Board;
(ii) any gains or losses on the sale or other disposition, not in the
ordinary course of business, of investments or fixed or capital assets, and
any taxes on the excluded gains and any tax deductions or credits on
account of any excluded losses.
-6-
<PAGE>
"Notice of Borrowing" shall mean any notice of any Borrowing.
-------------------
"Overdue Rate" shall mean (a) in respect of the principal of any Eurodollar
------------
Rate Loan, a rate per annum that is equal to the sum of two percent (2%) per
annum plus the per annum rate in effect thereon until the end of the then
current Applicable Interest Periods and, thereafter, a rate per annum that is
equal to the sum of two percent (2%) per annum plus the Prime Rate, and (b) in
respect of the principal of any Prime Rate Loan, and other amounts payable by
the Company hereunder (other than interest or amounts described in clause
(a) above), a per annum rate that is equal to the sum of two percent (2%) per
annum plus the Prime Rate.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any entity
----
succeeding to any or all of its functions under ERISA.
"Permitted Liens" shall mean:
---------------
(a) Liens and encumbrances in favor of the Bank;
(b) Liens for taxes, assessments or other governmental charges
incurred in the ordinary course of business and not yet past due or being
contested in good faith by appropriate proceedings and, if requested by the
Bank, bonded in a manner satisfactory to the Bank;
(c) Liens not delinquent created by statute in connection with
workers' compensation, unemployment insurance, social security and similar
statutory obligations;
(d) Liens of mechanics, materialmen, carriers, warehousemen or other
like statutory or common law liens securing obligations incurred in good faith
in the ordinary course of business that are not yet due and payable;
(e) Those existing Liens described on Schedule 1 attached hereto;
(f) Purchase money security interests, leases or any title retention
interest granted or retained in connection with the purchase or leasing of
equipment or fixtures by the Company.
"Person" or "person" shall include an individual, a corporation, an
------ ------
association, a partnership, a trust or estate, a joint stock company, an
unincorporated organization, a joint venture, a trade or business (whether or
not incorporated), a government (foreign or domestic) and any agency or
political subdivision thereof, or any other entity.
"Plan" shall mean, with respect to any person, any pension plan (other than
----
a Multiemployer Plan) subject to Title IV of ERISA or to the minimum funding
standards of Section 412 of the Code which has been established or maintained by
such person, any subsidiary of such person or any ERISA Affiliate, or by any
other person if such person, any Subsidiary of such person or any ERISA
Affiliate could have liability with respect to such pension plan.
-7-
<PAGE>
"Prepayment Date" shall mean the date on which the Company prepays any
---------------
principal of a Eurodollar Rate Loan.
"Prime Rate" shall mean the per annum rate that is equal to the Prime
----------
Margin plus the greater of (i) the per annum rate of interest announced from
time to time by the Bank as its "prime rate", which rate may not necessarily be
the lowest rate charged by the Bank to any of its customers, or (ii) the Federal
Funds Rate plus two percent (2%) per annum. The Prime Rate shall change
simultaneously with any change in such "prime rate" or such Federal Funds Rate,
if applicable.
"Prime Rate Loan" shall mean any Borrowing which bears interest at the
---------------
Prime Rate.
"Prohibited Transaction" shall mean any transaction involving any Plan
----------------------
which is proscribed by Section 406 of ERISA or Section 4975 of the Code.
"Reportable Event" shall mean a reportable event as described in Section
----------------
4043(b) of ERISA including those events as to which the thirty (30) day notice
period is waived under Part 2615 of the regulations promulgated by PBGC under
ERISA.
"Revolving Credit Commitment" shall mean the agreement by the Bank to make
---------------------------
Revolving Credit Loans pursuant to Section 2.1, in amounts not exceeding an
aggregate principal amount outstanding at any time of Five Million Dollars
($5,000,000).
"Revolving Credit Loan" shall mean any Borrowing under Section 2.4
---------------------
evidenced by the Revolving Credit Note and made pursuant to Section 2.1.
"Revolving Credit Note" shall mean any promissory note of the Company
---------------------
evidencing the Revolving Credit Loan, in substantially the form annexed hereto
as Exhibit A, as amended or modified from time to time and together with any
promissory note or notes in exchange or replacement therefor.
"Security Agreement" shall mean the security agreement in the form of
------------------
Exhibit B to the Agreement pursuant to which the Company grants to the Bank a
security interest in the Accounts, Chattel Paper, Documents, Equipment (other
than titled vehicles), Fixtures, General Intangibles, Goods, Instruments and
Inventory, wherever located and whether now owned or hereafter acquired,
together with all replacements thereof, substitutions therefor and all proceeds
and products thereof.
"Senior Debt Service" shall mean, for any applicable period, the sum of:
-------------------
(i) interest on the Indebtedness, plus (ii) Current Maturities of the
Indebtedness.
"Senior Debt Service Ratio" shall mean the ratio of the Company's EBITDA to
-------------------------
its Senior Debt Service. For purposes of this Agreement, the Senior Debt
Service Ratio shall be calculated at the end of each quarter of the Company's
fiscal year (except for the quarter ending March 31, 1999), commencing as of
December 31, 1998, using the previous four (4) fiscal quarters.
-8-
<PAGE>
"Subordinated Debt" shall mean indebtedness of the Company to third parties
-----------------
which has been subordinated to the Indebtedness pursuant to a subordination
agreement in form and content satisfactory to the Bank.
"Subsidiary" shall mean any corporation (whether now existing or hereafter
----------
organized or acquired) in which more than fifty percent (50%) of the outstanding
securities having ordinary voting power for the election of directors, as of any
applicable date of determination, shall be owned directly, or indirectly through
one or more subsidiaries, by the Company.
"Tangible Effective Net Worth" shall mean Tangible Net Worth plus
----------------------------
Subordinated Debt.
"Tangible Net Worth" shall mean, as of any applicable date of
------------------
determination, the excess of (i) the net book value of all assets of a person
(other than patents, patent rights, trademarks, trade names, franchises,
copyrights, licenses, goodwill, and similar intangible assets, after all
appropriate deductions in accordance with GAAP (including, without limitation,
reserves for doubtful receivables, obsolescence, depreciation and amortization),
over (ii) all Debt of such person.
"Termination Date" shall mean the earlier to occur of: (a) the date on
----------------
which the Commitment is terminated pursuant to Section 9.2 or (b) September 1,
2001.
"UCC" shall mean Public Act 174 of 1962 of the State of Michigan, as
---
amended.
"Unfunded Benefit Liabilities" shall mean, with respect to any Plan as of
----------------------------
any date, the amount of the unfunded benefit liabilities determined in
accordance with Section 4001(a)(18) or ERISA.
1.2 Other Definitions; Rules of Construction. As used herein, the terms
----------------------------------------
"Bank" and "Company" shall have the respective meanings ascribed thereto in the
introductory paragraph of this Agreement. The terms defined in Section 1.1,
shall include both the singular and the plural forms thereof and shall be
construed accordingly. All computations required hereunder and all financial
terms used herein shall be made or construed in accordance with generally
accepted accounting principles unless such principles are inconsistent with the
express requirements of this Agreement. Use of the terms, "herein", "hereof",
and "hereunder" shall be deemed references to this Agreement in its entirety and
not to the Section or clause in which such term appears. References to
"Sections" and "subsections" shall be to Sections and subsections, respectively,
of this Agreement unless otherwise specifically provided.
ARTICLE II
THE COMMITMENTS AND THE LOANS
-----------------------------
2.1 Revolving Credit Commitment. The Bank agrees, subject to the terms
---------------------------
and conditions of this Agreement, to make Revolving Credit Loans to the Company,
in an amount not to exceed the amounts set forth in Section 2.3.
-9-
<PAGE>
2.2 Notice of Borrowings. The Company shall give the Bank notice
--------------------
(a "Notice of Borrowing") of each Borrowing not later than 1:00 p.m. Grand
Rapids time on (a) the Business Day each Prime Rate Borrowing is to be made, and
(b) one Business Day before each Eurodollar Rate Borrowing is to be made,
specifying:
(i) the date of such Borrowing, which shall be a Business Day;
(ii) the aggregate amount of such Borrowing;
(iii) the Applicable Interest Rate;
(iv) and, in the case of Eurodollar Rate Loans, the Applicable
Interest Period.
2.3 Maximum Amount of Revolving Credit Loans. The sum of the aggregate
----------------------------------------
principal amount of all Revolving Credit Loans outstanding shall not at any time
exceed the Revolving Credit Commitment Amount.
2.4 Evidence of Borrowing. The Revolving Credit Loan shall be evidenced
---------------------
by the Revolving Credit Note, payable to the order of the Bank. The Bank shall
record on its books and records appropriate notations to evidence, the date,
amount and maturity of each Revolving Credit Loan made by it and the date and
amount of each payment of principal and interest made by the Company with
respect thereto. The records of the Bank regarding the Revolving Credit Loans
made by it shall constitute prima facie evidence of the information contained
therein.
2.5 Minimum Amounts of Borrowings. Except for (a) Eurodollar Borrowings
-----------------------------
and conversions thereof which exhaust the entire remaining amount of the
Revolving Credit Commitment, and (b) payments required pursuant to Sections 3.1
or 3.2, each Eurodollar Borrowing and each continuation or conversion thereof
and each repayment thereof shall be in a minimum amount of One Million Dollars
($1,000,000) and in integral multiples of One Hundred Thousand Dollars
($100,000).
2.6 Termination Date. The Revolving Credit Commitment shall terminate
----------------
on the Termination Date, and any Revolving Credit Loan outstanding (together
with accrued interest thereon) shall be due and payable on such date.
2.7 Subsequent Elections as to Borrowing. The Company may elect (a) to
------------------------------------
continue a Eurodollar Rate Borrowing or a portion thereof, as a Eurodollar Rate
Borrowing, or (b) to convert a Eurodollar Rate Borrowing or a portion thereof,
to a Prime Rate Borrowing, or (c) elect to convert a Prime Rate Borrowing, or a
portion thereof, to a Eurodollar Rate Borrowing, in each case by giving verbal
notice thereof to the Bank not later than 1:00 p.m. Detroit time (i) one
Business Day prior to the date any such continuation of or conversion to a
Eurodollar Rate Borrowing is to be effective and (ii) one Business Day prior to
the date any such continuation of or conversion to a Prime Rate Borrowing to be
effective, provided that an outstanding Eurodollar Rate Borrowing may only be
converted on the last day of the then current Eurodollar Interest Period with
respect to such Borrowing, and provided further, if a continuation of a
Borrowing as, or a conversion of a Borrowing
-10-
<PAGE>
to, a Eurodollar Rate Borrowing is requested, such notice shall also specify the
Applicable Interest Period to be applicable thereto upon such continuation or
conversion. If the Company shall not timely deliver such a notice with respect
to any outstanding Eurodollar Rate Borrowing, the Company shall be deemed to
have elected to convert such Eurodollar Rate Borrowing to a Prime Rate Borrowing
on the last day of the Applicable Interest Period with respect to such
Borrowing. If requested by the Bank, the Company shall confirm any verbal notice
hereunder in writing.
2.8 Limitations of Requests and Elections. Notwithstanding any other
-------------------------------------
provision of this Agreement to the contrary, if, upon receiving a request for a
Eurodollar Rate Borrowing, a request for a continuation of a Eurodollar Rate
Borrowing as a Eurodollar Rate Borrowing or a request for a conversion of a
Prime Rate Borrowing to a Eurodollar Rate Borrowing, (a) in the case of any
Eurodollar Rate Borrowing, deposits in Dollars for periods comparable to the
Eurodollar Interest Period elected by the Company are not available to the Bank
in the relevant interbank secondary market, or (b) the Eurodollar Rate will not
adequately and fairly reflect the cost to the Bank of making, funding or
maintaining the related Eurodollar Rate Loan, or (c) by reason of national or
international financial, political or economic conditions or by reason of any
applicable law, treaty, rule or regulation (whether domestic or foreign) now or
hereafter in effect, or the interpretation or administration thereof by any
governmental authority charged with the interpretation or administration
thereof, or compliance by the Bank with any guideline, request or directive of
such authority (whether or not having the force of law), including without
limitation exchange controls, it is impracticable, unlawful or impossible for
the Bank (i) to make or fund Eurodollar Rate Borrowings or (ii) to maintain
outstanding such Eurodollar Rate Borrowing, or (iii) to convert a Loan to a
Eurodollar Rate Loan, then the Company shall not be entitled, so long as such
circumstances continue, to request a Eurodollar Rate Borrowing or a continuation
of or conversion to a Eurodollar Rate Borrowing. In the event that such
circumstances no longer exist, the Bank shall again consider requests for
Eurodollar Rate Borrowings, and requests for continuations of and conversions to
Eurodollar Rate Borrowings.
ARTICLE III
PAYMENTS AND PREPAYMENTS OF LOANS
---------------------------------
3.1 Principal Payments. The Company shall pay to the Bank, unless
------------------
accelerated earlier pursuant to the terms of this Agreement, the principal
amount of each Eurodollar Rate Loan included in any Revolving Borrowing on the
last day of the Eurodollar Interest Period applicable thereto (unless continued
as provided in Section 2.7 or on the Termination Date, whichever is earlier),
and the principal amount of each Prime Rate Loan included in any Revolving
Credit Borrowing shall be due and payable on the Termination Date.
3.2 Optional Prepayment of Principal.
--------------------------------
3.2.1 Prime Rate Loans. The Company may pay all or part of the Loans
----------------
outstanding at any time and from time to time that bear interest at the Prime
Rate without penalty, premium or other charge.
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<PAGE>
3.2.2 Eurodollar Rate Loans. The Company may not prepay any portion
---------------------
of the Revolving Credit Loans as to which an election for a continuation of or a
conversion to a Eurodollar Rate Loan is pending, and any Eurodollar Rate Loan
may only be paid on the last day of the Applicable Interest Period with respect
thereto.
3.2.3 Notice of Prepayment. All notices of prepayment that are
--------------------
delivered to the Bank by the Company pursuant to this Section 3.2 shall be
delivered by 10:00 a.m. Detroit time on the relevant Business Day or if
delivered at a later time shall be deemed to have been delivered as of the next
Business Day.
3.3 Interest Payments. The Company shall pay interest to the Bank on
-----------------
the unpaid principal amount of each Loan, for the period commencing on the date
such Loan is made until such Loan is paid in full, on each Interest Payment Date
and at maturity (whether a stated maturity, by demand, by acceleration or
otherwise), and thereafter on demand, at the Applicable Interest Rate.
Notwithstanding the foregoing, the Company shall pay interest on demand at the
Overdue Rate on the outstanding principal amount of any Loan and any other
amount payable by the Company hereunder (other than interest) which is not paid
in full when due (whether at stated maturity, by demand, by acceleration or
otherwise) for the period commencing on the due date thereof until the same is
paid in full.
3.4 Fees.
----
3.4.1 Commitment Fee. The Company agrees to pay to the Bank a
--------------
Commitment Fee of Seven Thousand Five Hundred Dollars ($7,500) which shall be
deemed earned in full upon issuance of the commitment letter.
3.4.2 Unused Facility Fee. In the event the Average Daily
-------------------
Outstandings are less than Three Million Dollars ($3,000,000) during any period,
the Company shall pay to the Bank an unused facility fee for the period from the
date of this Agreement to and including the Termination date equal to one-eighth
of one percent (1/8%) per annum on the difference between the average unpaid
principal balance of the Revolving Credit Loans and the Revolving Credit
Commitment. Such fee shall be payable within ten (10) days of invoicing by the
Bank, for the fiscal quarters ending on each March, June, September and
December, commencing with the fiscal quarter ending September 30, 1998, whenever
the Average Daily Outstandings are less than Three Million Dollars ($3,000,000).
3.4.3 Preparation Fees. Upon demand of the Bank from time to time,
----------------
the Company shall pay to the Bank the amount of the expenses (including without
limit reasonable attorneys' fees not to exceed Five Thousand Dollars ($5,000)
and disbursements) incurred by the Bank from time to time in connection with the
preparation of this Agreement and related instruments.
3.5 General Provisions as to Payments. The Company shall make each
---------------------------------
payment of principal and interest on the Revolving Credit Loan and of fees and
other amounts payable hereunder, not later than 1:00 p.m. Detroit, Michigan,
time on the date when due, to the Bank at its address referred to in Section
10.2. Whenever any payment of principal of, or interest on, Prime Rate Loans
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<PAGE>
or any commitment, facility or other fee or expense payable hereunder shall be
due on the day which is not a Business Day, the date for payment thereof shall
be extended to then next succeeding Business Day. Whenever any payment of
principal of, or interest on, the Eurodollar Rate Loans shall be due on a day
which is not a Business Day, the date for payment thereof shall be extended to
the next succeeding Business Day. If the date for any payment of principal is
extended pursuant to this Section, by operation of law, or otherwise, interest
thereon shall be payable for such extended time.
3.6 Computation of Interest and Fees. Interest hereunder shall be
--------------------------------
computed on the basis of a year of 360 days and paid for the actual number of
days elapsed (including the first day but excluding the last day).
3.7 No Set Off or Deduction. All payments of principal of and interest
-----------------------
on the Loans and other amounts payable by the Company hereunder shall be made by
the Company without set off or counterclaim, and free and clear of, and without
deduction or with holding for, or on account of, any present or future taxes,
levies, imposts, duties, fees, assessments, or other charges of whatever nature,
imposed by any governmental authority, or by any department, agency or other
political subdivision or taxing authority.
3.8 Additional Costs. (a) In the event that the adoption of, or any
----------------
change in or in the interpretation by any governmental authority of, any
applicable law, treaty, rule or regulation (whether domestic or foreign), or
compliance by the Bank with any guideline, request or directive of any
governmental authority that is promulgated, made, issued, or changed (whether or
not having the force of law), shall (i) change the basis of taxation of payments
to the Bank of any amounts payable by the Company under this Agreement (other
than taxes imposed on the overall net income of the Bank), or (ii) shall impose,
modify or deemed applicable any reserve, special deposit or similar requirement
against assets of, deposits with or for the account of, or credit extended by
the Bank, or (iii) shall impose any other condition with respect to this
Agreement, the Commitments, the Revolving Credit Note or the Revolving Credit
Loan, and the result of any of the foregoing is to increase the cost to the
Bank, of making, funding or maintaining any Eurodollar Rate Loan or to reduce
the amount of any sum receivable by the Bank, thereon, then the Company shall
pay to the Bank from time to time, upon request by the Bank, additional amounts
sufficient to compensate the Bank, for such increased cost or reduced sum
receivable to the extent, in the case of any Eurodollar Rate Loan, the Bank is
not compensated therefor in the computation of the interest rate applicable to
such Eurodollar Rate Loan or pursuant to subsection (b) of this Section.
A statement as to the amount of such increased cost or reduced sum receivable
and reason therefor, prepared in good faith and in reasonable detail by the
Bank, and submitted by the Bank, to the Company, shall be conclusive and binding
for all purposes absent manifest error in computation.
(b) In the event that any applicable law, rule, regulation, or
guideline now in effect relating to capital adequacy, or that the adoption of,
or any change in or in the interpretation by any governmental authority of any
applicable law, treaty, rule or regulation (whether domestic or foreign), or
that compliance by the Bank with any guideline, request or directive of any
governmental authority (whether or not having the force of law) relating to
capital adequacy, or that is promulgated, made, issued, or changed including any
risk-based capital guidelines, affects or would affect the amount of capital
required or expected to be maintained by the Bank (or any corporation
controlling the Bank)
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<PAGE>
and the Bank determines that the amount of such capital required or expected to
be maintained is increased by or based upon the existence of the Bank's
obligations hereunder and such increase has the effect of reducing the rate of
return on the Bank's (or such controlling corporation's) capital as a
consequence of such obligations hereunder to a level below that which the Bank
(or such controlling corporation) could have achieved but for such circumstances
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by the Bank to be material, then the Company shall pay to the
Bank, from time to time, upon request by the Bank additional amounts sufficient
to compensate the Bank (or such controlling corporation) for any increase in the
amount of capital and reduced rate of return which the Bank reasonably
determines to be allocable to the existence of the Bank's obligations hereunder.
A statement as to the amount of such compensation and reason therefor, prepared
in good faith and in reasonable detail by the Bank, as the case maybe, and
submitted by the Bank to the Company, shall be conclusive and binding for all
purposes absent manifest error in computation.
3.9 Illegality and Impossibility. In the event that the adoption of, or
----------------------------
any change in or in the interpretation by any governmental authority of, any
applicable law, treaty, rule or regulation (whether domestic or foreign), or
compliance by the Bank with any guideline, request or directive of any
governmental authority that is promulgated, made, issued, or changed (whether or
not having the force of law), including without limitation exchange controls,
shall make it unlawful or impossible for the Bank to maintain any Eurodollar
Rate Loan under this Agreement, the Company shall upon receipt of notice thereof
from the Bank, repay in full the then outstanding principal amount of each
Eurodollar Rate Loan so affected, together with all accrued interest thereon to
the date of payment, (a) on the last day of the then current Eurodollar Interest
Period applicable to such Loan if the Bank may lawfully continue to maintain
such Loan to such day, or (b) immediately if the Bank may not continue to
maintain such Loan to such day.
3.10 Funding Losses. If the Company makes any payment of principal
--------------
with respect to any Eurodollar Rate Loan on any day other than the last day of
an Applicable Interest Period (whether pursuant to Section 3.2, Section 3.3,
Section 3.9, Article IX or otherwise), or if the Company fails to make any
payment of principal or interest in respect of a Eurodollar Rate Loan when due
unless continued or converted in accordance with Section 2.1, the Company shall,
in addition to any amounts that may be payable pursuant to Section 3.8 or 3.11,
reimburse the Bank, on demand, for any resulting loss, cost or expense incurred
by Bank as a result thereof, including, without limitation, any such loss, cost
or expense incurred in obtaining, liquidating, employing or redeploying deposits
from third parties, whether or not Bank shall have funded or committed to fund
such Loan. Such amount payable by the Company to Bank may include, without
limitation, an amount equal to the excess, if any, of (a) the amount of interest
which would have accrued on the amount so prepaid, or not so borrowed, refunded
or converted, for the period from the date of such prepayment or of such failure
to borrow, refund or convert, through the last day of the Applicable Interest
Period, at the applicable rate of interest for said Loan(s) provided hereunder,
over (b) the amount of interest (as reasonably determined by Bank) which would
have accrued to Bank on such amount by placing such amount on deposit for a
comparable period, with leading banks in the interbank eurodollar market.
Calculation of any amounts payable to Bank under this section shall be made as
though Bank shall have actually funded or committed to fund the relevant Loan
through the purchase of an underlying deposit in an amount equal to the amount
of such Loan and having a maturity comparable to the
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<PAGE>
Applicable Interest Period; provided, however, that Bank may fund any Revolving
Credit Loan in any manner it deems fit and the foregoing assumptions shall be
utilized only for the purpose of the calculation of amounts payable under this
section. Upon the written request of the Company, Bank shall deliver to the
Company a certificate setting forth the basis for determining such losses, costs
and expense, which certificate shall be conclusively presumed correct, absent
manifest error.
3.11 Regulation D Compensation. In the event that any applicable
-------------------------
law, treaty, rule or regulation (whether domestic or foreign) now or hereafter
in effect and whether or not presently applicable to Bank, or any interpretation
or administration thereof by any governmental authority charged with the
interpretation or administration thereof, or compliance by Bank with any
guideline, request or directive of any such authority (whether or not having the
force of law), including any risk-based capital guidelines, affects or would
affect the amount of capital required or expected to be maintained by Bank (or
any corporation controlling Bank), and Bank determines that the amount of such
capital is increased by or based upon the existence of any obligations of Bank
hereunder or the making or maintaining any Eurodollar Loan(s) hereunder, and
such increase has the effect of reducing the rate of return on Bank's (or such
controlling corporation's) capital as a consequence of such obligations or the
making or maintaining of such Eurodollar Loan(s) hereunder to a level below that
which Bank (or such controlling corporation) could have achieved but for such
circumstances (taking into consideration its policies with respect to capital
adequacy), then the Company shall pay to Bank, within fifteen (15) days of the
Company's receipt of written notice from Bank demanding such compensation,
additional amounts as are sufficient to compensate Bank (or such controlling
corporation) for any increase in the amount of capital and reduced rate of
return which Bank reasonably determines to be allocable to the existence of any
obligations of Bank hereunder or to the making or maintaining any Eurodollar
Loan(s) hereunder. A certificate of Bank as to the amount of such compensation,
prepared in good faith and in reasonable detail by Bank and submitted by Bank to
the Company, shall be conclusive and binding for all purposes absent manifest
error in computation.
ARTICLE IV
SECURITY
--------
To secure full and timely performance of the Company's covenants set out in
this Agreement and to secure the repayment of the Revolving Credit Note and all
other Indebtedness, the Company has granted and assigned a lien upon, and
security interest in, the Collateral pursuant to the Collateral Documents.
ARTICLE V
CONDITION PRECEDENT
-------------------
5.1 Conditions for First Borrowing. The obligation of the Bank to make
------------------------------
a Revolving Credit Loan on the occasion of the first Borrowing is subject to
receipt by the Bank of the following documents and completion of the following
matters, in form and substance satisfactory to the Bank:
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<PAGE>
5.1.1 Documents Executed and Filed. The Company shall have executed
----------------------------
(or caused to be executed) and delivered to the Bank the following:
(i) the Revolving Credit Note;
(ii) the Security Agreement; and
(iii) the Financing Statement.
5.1.2 Charter Documents. Certificates of recent date of the
-----------------
appropriate authority or official of the Company's state of incorporation
listing all charter documents of the Company on file in that office and
certifying as to the good standing and corporate existence of the Company
together with copies of such charter documents of the Company, certified as of a
recent date by such authority or official and certified as true and correct as
of the Effective Date by a duly authorized officer of the Company.
5.1.3 ByLaws and Corporate Authorizations. Copies of the by-laws of
-----------------------------------
the Company together with all authorizing resolutions and evidence of other
corporate action taken by the Company to authorize the execution, delivery and
performance by the Company of this Agreement and the Revolving Credit Note and
the consummation by the Company of the transactions contemplated hereby,
together with a certificate of incumbency of the Company containing, and
attesting to the genuineness of, the signatures of those officers authorized to
act on behalf of the Company in connection with this Agreement and the Revolving
Credit Note and the consummation by the Company of the transactions contemplated
hereby, certified as true and correct as of the Effective Date by a duly
authorized officer of the Company.
5.1.4 Consents, Approvals, etc. Copies of all governmental and
------------------------
nongovernmental consents, approvals, authorizations, declarations, registrations
or filings, if any, required on the part of the Company in connection with the
execution, delivery and performance of this Agreement or the Revolving Credit
Note or the transactions contemplated hereby or as a condition to the legality,
validity or enforceability of this Agreement or the Revolving Credit Note,
certified as true and correct and in full force and effect as of the Effective
Date by a duly authorized officer of the Company, or, if no consents are
required, a certificate of such officer to that effect.
5.1.5 Representations and Warranties. A certificate of a duly
------------------------------
authorized officer of the Company to the effect that (i) the representations and
warranties of the Company contained in this Agreement are true in all material
respects, and (ii) no Default or Event of Default has occurred and is
continuing.
5.1.6 Acquisition Complete. The Acquisition shall have been
--------------------
completed upon terms and conditions satisfactory to the Bank.
5.1.7 Certified Acquisition Documents. The Company shall have
-------------------------------
furnished to the Bank complete copies of the Acquisition Documents, all of which
shall have been certified by a duly authorized officer of the Company as of the
Effective Date as being complete, accurate and in effect.
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<PAGE>
5.1.8 Pro Forma Balance Sheet. The Company shall have furnished to
-----------------------
the Bank its pro forma balance sheet in form satisfactory to the Bank giving
effect to the Acquisition, together with a certificate of solvency.
5.1.9 Financial Statements. The Company shall have furnished to the
--------------------
Bank the audited balance sheet of EMCO as of June 30, 1998, in form acceptable
to the Bank.
5.1.10 Fees. The payment in full of all fees required to be paid by
----
the Company on or before the Effective Date hereunder;
5.1.11 UCC Lien Search. The Bank shall have received UCC record and
---------------
copy searches, disclosing no notice of any liens or encumbrances filed against
any of the Collateral other than Permitted Liens.
5.1.12 Casualty Insurance. The Company shall have furnished to the
------------------
Bank, in form, content and amounts and with companies satisfactory to the Bank,
casualty insurance policies with lender's loss payable clauses in favor of the
Bank, relating to the assets and properties (including, but not limited to, the
Collateral) of the Company.
5.1.13 Approval of Bank's Counsel. All actions, proceedings,
--------------------------
instruments and documents required to carry out the transactions contemplated by
this Agreement or incidental thereto and all other related legal matters shall
have been satisfactory to counsel for the Bank, and said counsel shall have been
furnished with such certified copies of actions and proceedings and such other
instruments and documents as they shall have reasonably requested.
5.1.14 Other Conditions. The Company shall have delivered to the
----------------
Bank such other certificates and documents as the Bank may reasonably request.
5.2 Further Conditions for Borrowing. The obligation of the Bank to
--------------------------------
make any Revolving Credit Loan on the occasion of each Borrowing (including
without limitation the first Borrowing) is further subject to the satisfaction
of the following conditions precedent:
(a) receipt by the Bank of a Notice of Borrowing is required under
this Agreement;
(b) the fact that, immediately after such Borrowing, the aggregate
outstanding principal amount of the Borrowings will not exceed the aggregate
amount of the relevant Commitments or otherwise be in excess of the amount
permitted hereunder;
(c) the fact that, at the time of, and immediately after, such
Borrowing, no Default or Event of Default shall have occurred and be continuing;
(d) the fact that the representations and warranties of the Company
contained in this Agreement shall be true in all material respects as of the
date of such Borrowing. Each Borrowing hereunder shall be deemed to be a
representation and warranty by the Company on the date of such Borrowing as to
the facts specified in subsections (b), (c) and (d) of this Section. For
purposes of this Section the representations and warranties contained in Section
6.5 hereof shall be deemed made with respect to the Financial Statements.
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<PAGE>
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
------------------------------
The Company represents and warrants to the Bank that:
6.1 Organization and Good Standing. The Company is a corporation duly
------------------------------
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and the Company is duly qualified to transact business and is in
good standing in each jurisdiction where failure to qualify would have a
material adverse effect on the Company or its business, and the Company has all
requisite power and authority, corporate or otherwise, to conduct its business,
to own and operate its properties and to execute and deliver, and to perform all
of its obligations under this Agreement, the Revolving Credit Note and the
Collateral Documents.
6.2 Due Authorization. The execution, delivery and performance by the
-----------------
Company of this Agreement, the Revolving Credit Note and the Collateral
Documents have been duly authorized by all necessary corporate action and do not
and will not (a) require any consent or approval of the stockholders of the
Company, (b) violate any provision of any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award presently in effect having
applicability to the Company or of the Articles of Incorporation or By-Laws of
the Company, or (c) result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Company is a party or by which it or its properties may
be bound or affected; and the Company is not in default under any such law,
rule, regulation, order, writ, judgment, injunction, decree, determination or
award or any such indenture, agreement, lease or instrument where (a), (b) or
(c) above could reasonably be expected to have a material adverse effect on the
business, properties, operations, or condition, financial or otherwise, of the
Company.
6.3 Third-Party Consents. No authorization, consent, approval, license,
--------------------
exemption of or filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary to the valid execution, delivery or performance
by the Company of this Agreement, the Revolving Credit Note or the Collateral
Documents.
6.4 Validity of Agreements. This Agreement constitutes, and the
----------------------
Revolving Credit Note and Collateral Documents when delivered hereunder will
constitute, legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their terms except as enforceability may
be limited by bankruptcy, insolvency and similar laws and equitable principles
affecting the enforcement of creditors' rights generally.
6.5 Financial Statements. The Financial Statements fairly present the
--------------------
financial condition of the Company as at such date and the results of the
operations of the Company as of such date and the results of the operations of
the Company for the period ended on such date, all in accordance with
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<PAGE>
generally accepted accounting principles applied on a consistent basis subject
to normal year end adjustments, and since June 30, 1998, there has been no
material adverse change in such financial condition or operations.
6.6 Litigation. Except as disclosed on Schedule 6.6, there are no
----------
actions, suits or proceedings pending or, to the knowledge of the Company,
threatened against the Company or the properties of the Company before any court
or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which, if determined adversely to the
Company, could reasonably be expected to have a material adverse effect on the
financial condition or business of the Company.
6.7 Regulation U. The Company is not engaged as one of its principal
------------
activities in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System, and no part of the proceeds of any Loan
hereunder will be used to purchase or carry any margin stock or for any other
purpose that would violate any of the margin regulations of the Board of
Governors.
6.8 Title to Property. Except as provided on Schedule 6.8, the Company
-----------------
has good and marketable title to its respective properties and assets, including
the properties and assets reflected in the most recent Financial Statements
referred to in Section 6.5 or delivered pursuant to Section 6.4, subject to no
Lien except Permitted Liens.
6.9 Other Agreements. The Company is not a party to any indenture, loan
----------------
or credit agreement or any lease of other agreement or instrument or subject to
any charter or corporate restriction which would have a material adverse effect
on the business, properties, assets, operations or condition, financial or
otherwise, of the Company, or on the ability of the Company to carry out its
obligations under this Agreement, the Revolving Credit Note or the Collateral
Documents.
6.10 Taxes. The Company has filed all tax returns (Federal, state and
-----
local) required to be filed and, subject to the provisions of Section 7.2, paid
all taxes shown thereon to be due, including interest and penalties, or provided
adequate reserves for payment thereof.
6.11 Accuracy of Information. No information, exhibit or report
-----------------------
furnished in writing by the Company to the Bank in connection with this
Agreement contains any material untrue statement of fact or omitted to state a
material fact or any fact necessary to make the statements contained therein not
materially misleading at the time that they were made.
6.12 Subsidiaries. The Company has no Subsidiaries except as disclosed
------------
on Schedule 6.12.
6.13 ERISA. The Company, its ERISA Affiliates and its respective Plans
-----
are in compliance in all material respects with those provisions of ERISA and of
the Code which are applicable with respect to any Plan. No Prohibited
Transaction and no Reportable Event has occurred with respect with any such
Plan. None of the Company, nor any of its ERISA Affiliates is an employer with
respect to any Multiemployer Plan. The Company, and its ERISA Affiliates have
met the minimum funding requirements under ERISA and the Code with respect to
each of their respective Plans, if
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<PAGE>
any, and have not incurred any liability to the PBGC or any Plan. The execution,
delivery and performance of this Agreement and the Revolving Credit Note does
not constitute a Prohibited Transaction. There is no material unfunded benefit
liability, determined in accordance with Section 4001(a)(18) of ERISA, with
respect to any Plan of the Company, its Subsidiaries or its ERISA Affiliates.
6.14 Environmental and Safety Matters. Except as provided on Schedule
--------------------------------
6.14, to the best of its knowledge after due inquiry, the Company is in
compliance in all material respects with all federal, state and local laws,
ordinances and regulations relating to safety and industrial hygiene or to the
environmental condition, including without limitation all Environmental Laws in
jurisdictions in which the Company owns or operates, or has owned or operated, a
facility or site, or arranges or has arranged for disposal or treatment of
hazardous substances, solid waste or other wastes, accepts or has accepted for
transport any hazardous substances, solid wastes or other wastes or holds or has
held any interest in real property or otherwise. To the best of its knowledge
after due inquiry, no demand, claim, notice, suit, suit in equity, action,
administrative action, investigation or inquiry whether brought by any
governmental authority, private person or entity or otherwise, arising under,
relating to or in connection with any Environmental Laws is pending or
threatened against the Company, any real property in which the Company holds or
has held an interest or any past or present operation of the Company. To the
best of its knowledge after due inquiry, the Company (a) is not the subject of
any federal or state investigation evaluating whether any remedial action is
needed to respond to a release of any toxic substance, radioactive materials,
hazardous wastes or related materials into the environment, (b) has not received
any notice of any its properties in violation of any Environmental Laws, or
(c) except as provided on Schedule 6.14, does not know of any basis for any such
investigation, notice or violation. To the best of its knowledge after due
inquiry, except as provided on Schedule 6.14, no release, threatened release or
disposal of hazardous waste, solid waste or other wastes is occurring or has
occurred on, under or to any real property in which the Company holds any
interest or performs any of its operations, in violation of any Environmental
Law.
6.15 Financial Condition.
-------------------
(a) The Company is solvent, able to pay its debts as they mature, has
capital sufficient to carry on its business and has assets the fair market value
of which exceed its liabilities, and the Company will not be rendered insolvent,
under-capitalized or unable to pay maturing debts by the execution or
performance of this Agreement, or by the other documents contemplated hereby.
There has been no material adverse change in the business, properties or
condition (financial or otherwise) of the Company or of any of its Subsidiaries
since the date of the latest of the Financial Statements.
(b) The incurrence of the Loans and the execution and delivery of the
Revolving Credit Note and the Collateral Documents, and the other documents
contemplated hereby by the Company, and the incurrence of the obligations set
forth therein or herein by the Company, as relevant, and creation of the
interests of the Bank and the obligations of the Company pursuant to the
foregoing, (i) are not fraudulent (as said term is used in the Uniform
Fraudulent Conveyance Act as adopted in the State of Michigan, being MCLA 566.11
et seq. ("Fraudulent Conveyance Act") and are not void or voidable, or
- - ------
ineffective as to a creditor or creditors (or as to a person or entity having
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<PAGE>
similar rights as such creditor or creditors would have) of the Company, under
applicable law, including the aforesaid Fraudulent Conveyance Act and the
Bankruptcy Code, and (ii) may not be avoided (as such term is used in Section
548 of the Bankruptcy Code) pursuant to the Bankruptcy Code.
6.16 Conditions Precedent. To the best knowledge of the Company, as
--------------------
of each date on which an advance is made, all appropriate conditions precedent
referred to in Section 2 hereof shall have been satisfied or waived in writing
by the Bank.
6.17 Indebtedness. Except as disclosed on Schedule 8.5 attached
------------
hereto, neither the Company nor any of its Subsidiaries has any indebtedness for
money borrowed or any direct or indirect obligations under any leases (whether
or not required to be capitalized under GAAP) or any agreements of guarantee or
surety except for the endorsement of negotiable instruments by the Company or
its Subsidiaries in the ordinary course of business for deposit or collection.
ARTICLE VII
AFFIRMATIVE COVENANTS OF THE COMPANY
------------------------------------
On a continuing basis from the date of this Agreement until the later of
the Termination Date or when the Indebtedness is paid in full and the Company
has performed all of its other obligations hereunder, the Company covenants and
agrees that it will:
7.1 Preservation of Corporate Existence, Etc. It will do or cause to be
----------------------------------------
done, all things necessary to preserve, renew and keep in full force and effect
its legal existence, and its qualification where necessary under applicable law,
and the rights, licenses, permits (including those required under Environmental
Laws), franchises, patents, copyrights, trademarks and trade names material to
the conduct of their business; and defend all of the foregoing against all
claims, actions, demands, suits or proceedings at law or in equity or by or
before any governmental instrumentality or other agency or regulatory authority.
7.2 Compliance with Laws, Etc. It will comply in all material respects
-------------------------
with all applicable laws, rules, regulations and orders of any governmental
authority, whether federal, state, local or foreign (including without
limitation ERISA, the Code and Environmental Laws), in effect from time to time;
and pay and discharge promptly when due all taxes, assessments and governmental
charges or levies imposed upon it or upon its income, revenues or property,
before the same shall become delinquent or in default, as well as all lawful
claims for labor, materials and supplies or otherwise, which, if unpaid, might
give rise to Liens upon such properties or any portion thereof, except to the
extent that payment of any of the foregoing is then being contested in good
faith by appropriate legal proceedings and with respect to which adequate
financial reserves have been established on the books and records of the
Company.
7.3 Maintenance of Properties; Insurance. It will maintain, preserve
------------------------------------
and protect all property that is material to the conduct of its business and
keep such property in good repair, working order and condition and from time to
time make, or cause to be made all needful and proper repairs,
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<PAGE>
renewals, additions, improvements and replacements thereto necessary in order
that the business carried on in connection therewith may be properly conducted
at all times in accordance with customary and prudent business practices for
similar businesses; and maintain in full force and effect insurance with
responsible and reputable insurance companies or associations in such amounts,
on such terms and covering such risks, including fire and other risks insured
against by extended coverage, as is usually carried by companies engaged in
similar business and owning similar properties similarly situated and maintain
in full force and effect public liability insurance, insurance against claims
for personal injury or death or property damage occurring in connection with any
of its activities or any of any properties owned, occupied or controlled by it,
in such amount as it shall reasonably deem necessary, and maintain such other
insurance as may be required by law or as may be reasonably requested by the
Bank for purposes of assuring compliance with this Section 7.3. All such
policies shall contain a provision whereby they may not be canceled or amended
except upon thirty (30) days' prior written notice to the Bank. The Company will
promptly deliver to the Bank, at the Bank's request, evidence satisfactory to
the Bank that such insurance has been so procured and, with respect to casualty
insurance, made payable to the Bank. If the Company fails to maintain
satisfactory insurance as herein provided, the Bank shall have the option to do
so, and the Company agrees to repay the Bank upon demand, with interest at the
Overdue Rate, all amounts so expended by the Bank.
7.4 Reporting Requirements. It will furnish to the Bank the following:
----------------------
7.4.1 Adverse Event. Promptly and in any event within five
-------------
(5) calendar days after becoming aware of the occurrence of (i) any Event of
Default, (ii) the commencement of any material litigation against the Company,
and any material developments therein, or (iii) entering into any material
contract or undertaking that is not entered into in the ordinary course of
business or (iv) any development in the business or affairs of the Company which
has resulted in or which is likely in the reasonable judgement of the Company,
to result in a material adverse change in the business, properties, operations
or condition, financial or otherwise of the Company, a statement of the chief
executive, chief operating officer or chief financial officer of the Company
setting forth details of such Event of Default or Default or such event or
condition or such litigation and the action which the Company has taken and
propose to take with respect thereto;
7.4.2 Quarterly Financial Statements. As soon as available and in
------------------------------
any event within forty-five (45) days after the end of each fiscal quarter of
the Company, the balance sheet of the Company as of the end of such month, and
the related statements of income, retained earnings and changes in financial
position for the period commencing at the end of the previous fiscal year and
ending with the end of such month, setting forth in each case in comparative
form the corresponding figures for the corresponding date or period of the
preceding fiscal year, all in reasonable detail and duly certified (subject to
year-end adjustments) by the chief financial officer of the Company as having
been prepared in accordance with generally accepted accounting principles,
together with: (i) a certificate of the chief financial officer of the Company
stating that no Event of Default or Default has occurred and is continuing or,
if an Event of Default or Default has occurred and is continuing, a statement
setting forth the details thereof and the action which the Company has taken and
propose to take with respect thereto, and (ii) a copy of the Company's 10Q filed
with the Securities and Exchange Commission;
-22-
<PAGE>
7.4.3 Annual Financial Reports. Furnish to the Bank, in form and
------------------------
reporting basis satisfactory to the Bank, not later than ninety (90) days after
the close of each fiscal year of the Company, beginning with the fiscal year
ended December 31, 1998: (i) financial statements of the Company on a
consolidated and consolidating basis containing the balance sheet of the Company
as of the close of each such fiscal year, statements of income and retained
earnings and a statement of cash flows for each such fiscal year, and such other
comments and financial details as are usually included in similar reports, and
(ii) a copy of the Company's 10K filed with the Securities and Exchange
Commission. Such reports shall be prepared in accordance with GAAP by
independent certified public accountants of recognized standing selected by the
Company and acceptable to the Bank and shall contain unqualified opinions as to
the fairness of the statements therein contained.
7.4.4 Compliance Reports. Furnish to the Bank within forty-five
------------------
(45) days after the end of each fiscal quarter of the Company, a Covenant
Compliance Certificate.
7.4.5 Shareholder Reports. Promptly furnish to the Bank upon
-------------------
becoming available a copy of all financial statements, reports, notices, proxy
statements and other communications sent by the Company or any of its
Subsidiaries as to their stockholders, and all regular and periodic reports
filed by the Company or any of its Subsidiaries with any securities exchange,
the Securities and Exchange Commission, or any governmental authorities
succeeding to any or all of the functions of said Commission.
7.4.6 Management Letters. Furnish to the Bank, promptly upon receipt
------------------
thereof, copies of all management letters and other reports of substance
submitted to the Company or any of its Subsidiaries by independent certified
public accountants in connection with any annual or interim audit of the books
of the Company or any of its Subsidiaries.
7.4.7 Other Information. Promptly, such other information respecting
-----------------
the business, properties, operations or condition, financial or otherwise, of
the Company as the Bank may from time to time reasonably request.
7.5 Maintain Tangible Effective Net Worth. On a consolidated and non-
-------------------------------------
consolidated basis, maintain a Tangible Effective Net Worth for it of not less
than $4,000,000.
7.6 Maintain Debt to Worth Ratio. On a consolidated and non-
----------------------------
consolidated basis, maintain the ratio of its Debt to Tangible Effective Net
Worth at not more than 2.0 to 1.0.
7.7 Maintain Senior Debt Service Ratio. On a consolidated basis,
----------------------------------
maintain the ratio of (i) EBITDA for the four fiscal quarters ending on the last
day of any fiscal quarter to (ii) Senior Debt Service for the same four fiscal
quarters at not less than 2.0 to 1.0.
7.8 Maintain Current Ratio. On a consolidated basis, maintain its ratio
----------------------
of Current Assets to Current Liabilities at not less than 1.25 to 1.0 from the
date of this Agreement and at all times thereafter.
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<PAGE>
7.9 Use of Loan Proceeds. Use of the proceeds of the loan hereunder
--------------------
only for the purposes set forth in the recitals to this Agreement.
7.10 ERISA. (a) At all times meet and cause each of the Subsidiaries to
-----
meet the minimum funding requirements of ERISA with respect to the Company's and
Subsidiaries' employee benefit plans subject to ERISA; (b) promptly after the
Company knows or has reason to know (i) of the occurrence of any event, which
would constitute a reportable event or prohibited transaction under ERISA, or
(ii) that the PBGC or the Company has instituted or will institute proceedings
to terminate an employee pension plan, deliver to the Bank a certificate of the
chief financial officer of the Company setting forth details as to such event or
proceedings and the action which the Company proposes to take with respect
thereto, together with a copy of any notice of such event which may be required
to be filed with the PBGC; and (c) furnish to the Bank (or cause the plan
administrator to furnish the Bank) a copy of the annual return (including all
schedules and attachments) for each plan covered by ERISA, and filed with the
Internal Revenue Service by the Company not later than ten (10) days after such
report has been filed.
7.11 Maintain Deposit Accounts. Maintain its principal deposit accounts
-------------------------
with the Bank.
7.12 EMCO Audited Financial Statement. Furnish to the Bank not later
--------------------------------
than October 1, 1998, the audited financial statements of EMCO for the periods
ending December 31, 1996, and December 31, 1997, in form acceptable to the Bank.
ARTICLE VIII
NEGATIVE COVENANTS
------------------
On a continuing basis from the date of this Agreement until the later of
the Termination Date or when the Indebtedness is paid in full and the Company
has performed all of its other obligations hereunder, the Company covenants and
agrees that, without the prior written consent of the Bank, it will not, and
will not permit any Subsidiary, to:
8.1 Dividends. Declare or pay any dividends on, or make any other
---------
distribution (whether by reduction of capital or otherwise) with respect to any
shares of its capital stock, except for dividends from a Subsidiary to the
Company and dividends required to be paid on Preferred Stock.
8.2 Stock Issuance. Issue any additional shares of its capital stock,
--------------
or any warrant, right or option relating thereto or any security convertible
into any of the foregoing; except as provided in the Company's stock plans in
existence on the date hereof, as described on Schedule 8.2 attached hereto.
8.3 Stock Acquisition. Purchase, redeem, retire or otherwise acquire
-----------------
any of the shares of its capital stock, or make any commitment to do so;
provided, however, that the Company may acquire shares of its capital stock as
- - -------- -------
may be authorized from time to time by the Board of Directors of the Company;
provided, further, however, that the Company shall not acquire in excess of
- - -------- ------- -------
$500,000 of its capital stock without prior approval from the Bank.
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<PAGE>
8.4 Liens and Encumbrances. Create, incur, assume or suffer to exist
----------------------
any mortgage, pledge, encumbrance, security interest, lien or charge of any kind
upon any of its property or assets (including without limit any charge upon
property purchased or acquired under a conditional sales or other title
retaining agreement or lease required to be capitalized under GAAP) whether now
owned or hereafter acquired other than Permitted Liens.
8.5 Indebtedness. Incur, create, assume or permit to exist any
------------
indebtedness or liability on account of deposits or advances or any indebtedness
or liability for borrowed money, or any other indebtedness or liability
evidenced by notes, bonds, debentures or similar obligations, or any other
indebtedness whatsoever, except for (a) the Indebtedness, (b) indebtedness
subordinated to the prior payment in full of the Indebtedness upon terms and
conditions approved in writing by the Bank, (c) existing indebtedness to the
extent set forth on attached Schedule 8.5, (d) trade indebtedness incurred and
paid in the ordinary course of business, (e) contingent indebtedness to the
extent permitted by Section 8.7 of this Agreement, and (f) indebtedness secured
by Permitted Liens.
8.6 Extension of Credit. Make loans, advances or extensions of credit
-------------------
to any person, except for sales on open account and otherwise in the ordinary
course of business.
8.7 Guarantee Obligations. Except as disclosed on Schedule 8.7,
---------------------
guarantee or otherwise, directly or indirectly, in any way be or become
responsible for obligations of any other Person, whether by agreement to
purchase the indebtedness of any other Person, agreement for the furnishing of
funds to any other Person through the furnishing of goods, supplies or services,
by way of stock purchase, capital contribution, advance or loan, for the purpose
of paying or discharging (or causing the payment or discharge of) the
indebtedness of any other Person, or otherwise, except for the endorsement of
negotiable instruments by the Company in the ordinary course of business for
deposit or collection.
8.8 Subordinate Indebtedness. Subordinate any indebtedness due to it
------------------------
from a Person to indebtedness of other creditors of such Person.
8.9 Property Transfer, Merger or Lease-Back. (a) On an annual basis,
---------------------------------------
sell, lease, transfer or otherwise dispose of properties and assets having an
aggregate book value of more than One Hundred Thousand Dollars ($100,000.00)
(whether in one transaction or in a series of transactions) except (i) the sale,
lease or other transfer of inventory in the ordinary course of business, and
(ii) the sale, transfer or disposition of obsolete equipment, also in the
ordinary course of business; (b) change its name (other than to MFIC with at
least thirty (30) days prior writte notice to the Bank), consolidate with or
merge into any other corporation (other than each other), permit another
corporation to merge into them, acquire all or substantially all the properties
or assets of any other Person, enter into any reorganization or recapitalization
or reclassify their capital stock, or (c) enter into any sale-leaseback
transaction.
8.10 Pension Plan. (a) Allow any fact, condition or event to occur or
------------
exist with respect to any employee pension or profit sharing plans established
or maintained by them which might constitute grounds for termination of any such
plan or for the court appointment of a trustee to administer any such plan, or
(b) permit any such plan to be the subject of termination proceedings
-25-
<PAGE>
(whether voluntary or involuntary) from which termination proceedings there may
result a liability of the Company to the PBGC which, in the opinion of the Bank,
will have a materially adverse effect upon the operations, business, property,
assets, financial condition or credit of the Company.
8.11 Misrepresentation. Furnish the Bank with any certificate or other
-----------------
document that contains any untrue statement of a material fact or omits to state
a material fact necessary to make such certificate or document not misleading in
light of the circumstances under which it was furnished.
8.12 Margin Stock. Apply any of the proceeds of the Loans to the
------------
purchase of carrying of any "margin stock" within the meaning of Regulation U of
the Board of Governors of the Federal Reserve System, or any regulations,
interpretations or rulings thereunder.
ARTICLE IX
EVENTS OF DEFAULT - ENFORCEMENT - APPLICATION OF PROCEEDS
---------------------------------------------------------
9.1 Events of Default. The occurrence of any of the following events
-----------------
shall constitute an Event of Default hereunder:
9.1.1 Failure to Pay Monies Due. If the Company shall fail to pay
-------------------------
when due, any principal or interest under the Revolving Credit Note or other
amount payable by the Company under this Agreement (including insurance) or any
taxes prior to their becoming delinquent or if the Company or any guarantor
shall fail to pay, when due, any indebtedness, obligation or liability
whatsoever of the Company or any guarantor to the Bank.
9.1.2 Misrepresentation. If any warranty or representation of the
-----------------
Company in connection with or contained in this Agreement, or if any financial
data or other information now or hereafter furnished to the Bank by or on behalf
of the Company, shall prove to be false or misleading in any material respect
when made.
9.1.3 Noncompliance with Agreement. If the Company shall fail to
----------------------------
perform in the time and manner required any of their obligations or covenants
under, or shall fail to comply with any of the provisions of, this Agreement or
any other agreement with the Bank to which they may be a party, which does not
involve the failure to make a payment when due (be it principal, interest,
taxes, insurance or otherwise) and which is not cured by the Company within
forty-five (45) days after the earlier of the date of notice to the Company by
the Bank on behalf of the Bank of such Default or the date the Bank is notified,
or should have been notified pursuant to the Company's obligation under Section
7.4.1 hereof, of such Default.
9.1.4 Other Defaults. If the Company shall default in the payment
--------------
when due of any of its indebtedness in excess of Fifty Thousand Dollars
($50,000), (other than indebtedness owing to the Bank or disputed in good faith)
or in the observance or performance of any term, covenant or condition in any
agreement or instrument evidencing, securing or relating to such indebtedness,
and such default actually results in an acceleration of the indebtedness.
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<PAGE>
9.1.5 Judgments. If there shall be rendered against the Company one
---------
or more judgments or decrees involving an aggregate liability of One Hundred
Thousand Dollars ($100,000.00) or more at any one time outstanding, which has or
have become non-appealable and shall remain undischarged, unsatisfied by
insurance and unstayed for more than thirty (30) days, whether or not
consecutive; or if a writ of attachment or garnishment against the property of
the Company shall be issued and levied in an action claiming One Hundred
Thousand Dollars ($100,000.00) or more at any one time outstanding and not
released or appealed and bonded in an amount and manner reasonably satisfactory
to the Bank within thirty (30) days after such issuance and levy.
9.1.6 Business Suspension, Bankruptcy, Etc. If the Company shall
-------------------------------------
voluntarily suspend transaction of its business; or if the Company shall not
generally pay its debts as they mature or shall make a general assignment for
the benefit of creditors; or proceedings in bankruptcy, or for reorganization or
liquidation of the Company under the Bankruptcy Code or under any other state or
federal law for the relief of debtors shall be commenced or shall be commenced
against the Company and shall not be discharged within thirty (30) days of
commencement; or a receiver, trustee or custodian shall be appointed for the
Company or for any substantial portion of its respective properties or assets.
9.1.7 Inadequate Funding or Termination of Employee Benefit Plan(s).
-------------------------------------------------------------
If the Company shall fail to meet its minimum funding requirements under ERISA
with respect to any employee benefit plan established or maintained by it, or if
any such plan shall be the subject of termination proceedings (whether voluntary
or involuntary) and there shall result from such termination proceedings a
liability of Company to the PBGC, either of which in the opinion of the Bank,
could reasonably be expected to have a materially adverse effect upon the
operations, business, property, assets, financial condition or credit of the
Company.
9.1.8 Occurrence of Certain Reportable Events. If there shall occur,
---------------------------------------
with respect to any pension plan maintained by the Company any reportable event
(within the meaning of Section 4043(b) of ERISA) which the Bank shall determine
constitutes a ground for the termination of any such plan, and if such event
continues for thirty (30) days after the Bank gives written notice to the
Company, provided that termination of such plan or appointment of such trustee
would, in the opinion of the Bank, have a materially adverse effect upon the
operations, business, property, assets, financial condition or credit of the
Company.
9.2 Acceleration of Indebtedness; Remedies. Upon the occurrence of an
--------------------------------------
Event of Default which is not cured or waived within the time period provided in
Section 9.1, the obligation of the Bank to make advances pursuant to the
Revolving Credit Commitment shall cease and all Indebtedness shall be due and
payable in full immediately at the option of the Bank without presentation,
demand, protest, notice of dishonor or other notice of any kind, all of which
are hereby expressly waived. Unless all of the Indebtedness is then immediately
fully paid, the Bank shall have and may exercise any one or more of the rights
and remedies for which provision is made for a secured party under the UCC,
under the Security Agreement or under any other document contemplated hereby or
for which provision is provided by law or in equity, including, without
limitation, the right to take possession and sell, lease or otherwise dispose of
any or all of the
-27-
<PAGE>
Collateral and to set off against the Indebtedness any amount owing by the Bank
to the Company and/or any property of the Company in possession of the Bank. The
Company agrees, upon request of the Bank, to assemble the Collateral and make it
available to the Bank at any place designated by the Bank which is reasonably
convenient to the Bank and the Company.
9.3 Application of Proceeds. All of the Indebtedness shall constitute
-----------------------
one loan secured by the Bank's security interest in the Collateral and by all
other security interests, mortgages, liens, claims, and encumbrances now and
from time to time hereafter granted from the Company to the Bank. Upon the
occurrence of an Event of Default which is not cured within the cure period, if
any, provided in Section 9.1, the Bank may in its sole discretion apply the
Collateral to any portion of the Indebtedness. The proceeds of any sale or
other disposition of the Collateral authorized by this Agreement shall be
applied by the Bank, first upon all expenses authorized by the UCC or otherwise
in connection with the sale and all reasonable attorneys' fees and legal
expenses incurred by the Bank; the balance of the proceeds of such sale or other
disposition shall be applied in the payment of the Indebtedness, first to
interest, then to principal, then to other Indebtedness and the surplus, if any,
shall be paid over to the Company or to such other Person or Persons as may be
entitled thereto under applicable law. The Company shall remain liable for any
deficiency, which the Company shall pay to the Bank immediately upon demand.
9.4 Cumulative Remedies. The remedies provided for herein are
-------------------
cumulative to the remedies for collection of the Indebtedness as provided by
law, in equity or by any mortgage, security agreement or other document
contemplated hereby. Nothing herein contained is intended, nor shall it be
construed, to preclude the Bank from pursuing any other remedy for the recovery
of any other sum to which the Bank may be or become entitled for the breach of
this Agreement by the Company.
ARTICLE X
MISCELLANEOUS
-------------
10.1 Amendments, Etc. (a) No amendment, modification, termination
---------------
or waiver of any provision of this Agreement nor any consent to any departure
therefrom shall be effective unless the same shall be in writing and signed by
the Bank and the Company.
(b) Any such amendment, waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
(c) In the event of any conflict between this Agreement and the
Revolving Credit Note or Collateral Documents, the provisions of this Agreement
shall control.
10.2 Notices. (a) Except as otherwise provided in Section 10.2(c)
-------
hereof, all notices and other communications hereunder shall be in writing and
shall be delivered or sent to the Company and the Bank at the respective
addresses and numbers for notices set forth on the signature pages hereof, or to
such other address as may be designated by the Company or the Bank by notice to
the other parties hereto. All notices and other communications shall be deemed
to have been given at the time of actual delivery thereof to such address, or if
sent by certified or registered mail, postage prepaid,
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<PAGE>
to such address, on the third day after the date of mailing, or if deposited
prepaid with Federal Express or other nationally recognized overnight delivery
service prior to the deadline for next day delivery, or the Business Day next
following such deposit, or if sent via facsimile promptly confirmed, provided,
however, that notices to the Bank shall not be effective until received.
(b) Notices by the Company to the Bank with respect to terminations
or reductions of the Commitments, requests for Loans, requests for continuations
or conversions of Loans, and notices of prepayment shall be irrevocable and
binding on the Company.
(c) Any request for a Loan or a continuation or conversion thereof,
and any notice to be given by the Bank hereunder, may be given by telephone, and
all such notices given by the Company must be immediately confirmed in writing
in a manner provided in Section 2.2. Any such notice given by telephone shall
be deemed effective upon receipt thereof by the party to whom such notice is to
be given.
10.3 No Waiver By Conduct; Remedies Cumulative. No course of dealing
-----------------------------------------
on the part of the Bank, nor any delay or failure on the part of the Bank in
exercising any right, power or privilege hereunder shall operate as a waiver of
such right, power or privilege or otherwise prejudice the Bank's rights and
remedies hereunder; nor shall any single or partial exercise thereof preclude
any further exercise thereof or the exercise of any other right, power or
privilege. No right or remedy conferred upon or reserved to the Bank under this
Agreement, the Revolving Credit Note or the Collateral Documents is intended to
be exclusive of any other right or remedy, and every right and remedy shall be
cumulative and in addition to every other right or remedy granted thereunder or
now or hereafter existing under any applicable law. Every right and remedy
granted by this Agreement or the Revolving Credit Note or by applicable law to
the Bank may be exercised from time to time and as often as may be deemed
expedient by the Bank and, unless contrary to the express provisions of this
Agreement, the Revolving Credit Note, or the Collateral Documents irrespective
of the occurrence or continuance of any Default or Event of Default.
10.4 Reliance on and Survival of Various Provisions. All terms,
----------------------------------------------
covenants, agreements, representations and warranties of the Company made herein
or in any certificate, report, financial statement or other document furnished
by or on behalf of the Company in connection with this Agreement shall be deemed
to be material and to have been relied upon by the Bank, notwithstanding any
investigation heretofore or hereafter made by the Bank, and those covenants and
agreements of the Company set forth in Section 3.9, 3.10, 3.11 and 10.5 hereof
shall survive the repayment in full of the Loans and termination of the
Commitments.
10.5 Expenses. The Company agrees to pay, or reimburse the Bank for
--------
the payment of, on demand, (i) the reasonable fees and expenses of counsel
to the Bank, including without limitation the fees and expenses of its counsel
in connection with the preparation, execution, delivery and administration of
this Agreement, the Revolving Credit Note, the Collateral Documents and the
consummation of the transactions contemplated hereby (subject to Section 3.4.3)
and in connection with advising the Bank as to its rights and responsibilities
with respect thereto, and in connection with any amendments, waivers or consents
in connection therewith, and (ii) all stamp and other taxes and fees payable or
determined to be payable in connection with the execution, delivery, filing or
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<PAGE>
recording of this Agreement, the Revolving Credit Note and the consummation of
the transactions contemplated hereby,and any and all liabilities with respect to
or resulting from any delay in paying or omitting to pay such taxes or fees, and
(iii) all reasonable costs and expenses of the Bank (including reasonable fees
and expenses of counsel and whether incurred through negotiations, legal
proceedings or otherwise) in connection with any Default or Event of Default or
the enforcement of, or the exercise or preservation of any rights under, this
Agreement, the Revolving Credit Note and the Collateral Documents, or in
connection with refinancing or restructuring of the credit arrangements provided
under this Agreement.
10.6 Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their respective successors
and assigns, provided that the Company may not, without prior consent of the
Bank, assign its rights or obligations hereunder or under the Revolving Credit
Note and the Bank shall not be obligated to make any Revolving Credit Loan
hereunder to any entity other than the Company. The Bank may sell to any
financial institution or institutions, and such financial institution or
institutions may further sell, a participation interest (undivided or divided)
in, the Revolving Credit Loan and the Bank's rights and benefits under this
Agreement, the Revolving Credit Note and the Collateral Documents, and to the
extent of such sale such participant or participants shall have the same rights
and benefits against the Company as it or they would have had if such
participant or participants were the Bank making the Revolving Credit Loan to
the Company hereunder, provided, however, that (a) the Bank's obligations under
this agreement shall remain unmodified and fully effective and enforceable
against the Bank, (b) Bank shall remain solely responsible to the other parties
hereto for the performance of such obligations, (c) Bank shall remain the holder
of its Revolving Credit Note for all purposes of this Agreement, (d) the Company
shall continue to deal solely and directly with the Bank in connection with the
Bank's rights and obligations under this Agreement, and (e) the Bank shall not
grant to its participant any rights to consent or withhold consent to any action
taken by the Bank under this agreement.
10.7 Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
10.8 Governing Law. This Agreement is a contract made under, and shall
-------------
be governed by and construed in accordance with, the law of the State of
Michigan applicable to contracts made and to be performed entirely within such
State and without giving effect to choice of law principals of such State. The
Company further agrees that any legal action or proceeding with respect to this
Agreement, the Revolving Credit Note, the Collateral Documents or the
transactions contemplated hereby may be brought in any court of the State of
Michigan, Kent County, or in any court of the United States of America sitting
in the Western District of Michigan and the Company hereby submits to and
accepts generally and unconditionally the jurisdiction of those courts with
respect to its person and property, and irrevocably consents to the service of
process in connection with any such action or proceeding by personal delivery to
the Company or by the mailing thereof by registered or certified mail, postage
prepaid to the Company at its address set forth in Section 10.2. Nothing in
this paragraph shall affect the right of the Bank to serve process in any other
manner permitted by law or limit the right of the Bank to bring any such action
or proceeding against the Company or property
-30-
<PAGE>
in the courts of any other jurisdiction. The Company hereby irrevocably waives
any objection to the laying of venue of any such suit or proceeding in the above
described courts.
10.9 Table of Contents and Headings. The table of contents and the
------------------------------
headings of the various subdivisions hereof are for the convenience of
reference only and shall in no way modify any of the terms or provisions hereof.
10.10 Construction of Certain Provisions. If any provision of this
----------------------------------
Agreement refers to any action to be taken by any person, or which such person
is prohibited from taking, such provision shall be applicable whether such
action is taken directly or indirectly by such person, whether or not expressly
specified in such provision.
10.11 Integration and Severability. This Agreement embodies the entire
----------------------------
agreement and understanding between the Company and the Bank and supersedes all
prior agreements and understandings, relating to the subject matter hereof. In
case any one or more of the obligations of the Company under this Agreement, the
Revolving Credit Note or the Collateral Documents shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and enforceability of
the remaining obligations of the Company shall not in any way be affected or
impaired thereby, and such invalidity, illegality or unenforceability in one
jurisdiction shall not affect the validity, legality or enforceability of the
obligations of the Company under this Agreement, the Revolving Credit Note or
the Collateral Documents in any other jurisdiction.
10.12 Independence of Covenants. All covenants hereunder shall be given
-------------------------
independent effect so that if a particular action or condition is not permitted
by any such covenant, the fact that it would be permitted by an exception to, or
would be otherwise within the limitations of, another covenant shall not avoid
the occurrence of a Default or an Event of Default or any event or condition
which with notice or lapse of time, or both, could become such a Default or an
Event of Default if such action is taken or such condition exists.
10.13 Interest Rate Limitation. Notwithstanding any provisions of this
------------------------
Agreement, the Revolving Credit Note or the Collateral Documents, in no event
shall the amount of interest paid or agreed to be paid by the Company exceed an
amount computed at the highest rate of interest permissible under applicable
law. If, from any circumstances whatsoever, fulfillment of any provision of
this Agreement, the Revolving Credit Note or the Collateral Documents at the
time performance of such provision shall be due, shall involve exceeding the
interest rate limitation validly prescribed by law which a court of competent
jurisdiction may deem applicable hereto, then, ipso facto, the obligations to be
---- -----
fulfilled shall be reduced to an amount computed at the highest rate of interest
permissible under applicable law, and if for any reason whatsoever the Bank
shall ever receive as interest an amount which would be deemed unlawful under
such applicable law such interest shall be automatically applied to the payment
of principal of the Loans outstanding hereunder (whether or not then due and
payable) without cost or fee to the Company and not to the payment of interest,
or shall be refunded to the Company if such principal and all other obligations
of the Company to the Bank have been paid in full.
-31-
<PAGE>
10.14 Waiver of Jury Trial. The Bank and Company, after consulting or
--------------------
having had the opportunity to consult with counsel, knowingly, voluntarily and
intentionally waive any right any of them may have to a trial by jury in any
litigation based upon or arising out of this Agreement, the Revolving Credit
Note or any related instrument or agreement or any of the transactions
contemplated by this Agreement or any course of conduct, dealing, statements
(whether oral or written) or actions of either of them. Neither the Bank nor
the Company shall seek to consolidate, by counterclaim or otherwise, any such
action in which a jury trial has been waived with any other action in which a
jury trial cannot be or has not been waived. These provisions shall not be
deemed to have been modified in any respect or relinquished by either the Bank
or the Company except by a written instrument executed by all of them.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered on the 12th day of August, 1998, which shall
be the Effective Date of this Agreement, notwithstanding the day and year first
above written.
MICROFLUIDICS INTERNATIONAL CORPORATION
Address for Notice:
30 Ossipee Road
Newton, MA 02164-9101 By: /s/ Michael A. Lento
Fax No. (617) 965-1213 ------------------------------------
Its President and Treasurer
---------------------------------
COMERICA BANK
Address for Notice:
1000 Campau Square Plaza
99 Monroe, N.W. By: /s/ Michael VanDiepenbos
Grand Rapids, MI 49503 ------------------------------------
Fax No. (616) 776-7885 Its
----------------------------------
-32-
<PAGE>
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Nine Months Ended September 30
------------------------------
1998 1997
---- ----
Average shares outstanding: Basic 5,129,015 4,918,196
========== ==========
Net income (loss) (271,409) 572,014
========== ==========
Net income (loss) per share $ (.05) $ .12
========== ==========
Effect of dilutive stock options 0 105,592
---------- ----------
Average shares outstanding:
Diluted 5,129,015 5,023,788
========== ==========
Net income per share $ (.05) $ .11
========== ==========
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 995,988
<SECURITIES> 45,024
<RECEIVABLES> 2,109,092
<ALLOWANCES> 0
<INVENTORY> 4,702,879
<CURRENT-ASSETS> 8,171,202
<PP&E> 3,378,827
<DEPRECIATION> (2,507,730)
<TOTAL-ASSETS> 15,652,053
<CURRENT-LIABILITIES> 5,613,148
<BONDS> 0
0
0
<COMMON> 60,570
<OTHER-SE> 12,491,423
<TOTAL-LIABILITY-AND-EQUITY> 15,652,053
<SALES> 5,855,284
<TOTAL-REVENUES> 5,855,284
<CGS> 3,055,848
<TOTAL-COSTS> 6,151,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,904
<INCOME-PRETAX> (271,409)
<INCOME-TAX> 0
<INCOME-CONTINUING> (271,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (271,409)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
