<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 No. 0-1412
M. H. Rhodes, Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-0509270
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
99 Thompson Road, Avon, Connecticut 06001
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (860) 673-3281
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Par Value $1.00 Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $497,057 on March 16, 1998 based on the closing price of $4.88
per share reported by The National Quotation Bureau, Inc. An asked price of
$8.25 was reported. The number of shares of the registrant's common stock, $1.00
par value, outstanding on March 16, 1998 was 196,736.
This report contains 64 pages in accordance with the sequential numbering
system. The exhibit index is located on sequentially numbered page 32.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
M. H. Rhodes, Inc. (the "Company") manufactures mechanical and electrical
timers. The Company has been in business since 1930. The Company's Canadian
subsidiary, M. H. Rhodes (Canada) Limited, which also manufactures timers had
been in business since 1960. In 1990, the Company expanded its product lines by
acquiring machinery, equipment and inventory of the Ripley Company, Inc.
(Ripley) Photocontrol Division. On September 30, 1996 the Company ceased active
business operation for the Canadian subsidiary and transferred its assets and
liabilities to its parent company, M. H. Rhodes, Inc. The Company's Board of
Directors voted for its dissolution which is currently in process.
PRODUCTS
PHOTOCONTROLS: Rhodes' Photocontrol line is sold under the name of "Ripley
Photocontrols", a product line we acquired several years ago from the Ripley Co.
This line of products is sold primarily to U. S. utilities and is used to turn
street and roadway lighting on at dusk and off at dawn. There are approximately
twenty million in use in the U. S. A. and millions more in other countries. The
U. S. in 1997 has converted between 20% to 25% of this total to electronic
photocontrols from the once dominant magnetic-type photocontrol. This allows
utilities to have a photocontrol that will last the life of a street lamp, which
is approximately 6 years. Ripley's sales are now 50% electronic, 35% magnetic,
and 15% thermal, the latter of which is sold primarily into the international
market.
TIMERS: Rhodes' engineering has developed and introduced several new products
into niche markets in 1997. One such device was to meet the government and
commercial specifications for fire fighting equipment. Our specially designed
timer signals the fire fighter while he is attempting to extinguish a fire. The
timer shows how much air supply the fire fighter has left in his tanks in order
that he can safely leave his position and recharge or change his air supply.
This device is mounted on his or her fire fighting jackets along with the tanks.
Another new application was the introduction of timing devices in
explosion-proof boxes. These devices can be used in areas where switching is
required in paint systems, oil rigs and grain refineries at a set time without
having someone manually switching them off.
Rhodes' OEM sales were up 3% over 1996 and still represent over 62% of
Rhodes' timer sales. Rhodes timers are used in commercial cooking equipment such
as convection ovens, fast food ovens, gas grills and steam ovens. Additional
applications would be biomedical devices such as blood centrifuges, stimulators,
orthopedic devices, etc. A third category would be bath and spa timers which
would be another major OEM segment.
Rhodes also introduced a new concept of automatic water faucet timers that
meet the new specifications for handicapped applications. These were required to
be in all public restrooms starting in 1997. These units are being sold through
a Fortune 500 company who has the largest share of the U. S. faucet market and
Rhodes supplies a base of over 1000 different customers.
SOURCE AND AVAILABILITY OF RAW MATERIALS
The Company has never experienced a serious problem in obtaining raw
material and component parts, as there are generally many suppliers available to
meet the Company's requirements.
I-1
<PAGE> 3
PATENTS AND TRADEMARKS
The Company has held hundreds of patents over the past 68 years along with
registered trademarks. These are maintained and reviewed as they come up for
renewal. The Company retains a patent attorney who monitors all activities. The
Company has seven (7) trademarks which are actively used: MARK TIME, RHODES,
SUNSWITCH, LIGHT WATCHMAN and SPECTRUM INNOVATIONS. COMPETITOR AND SURVIVOR
SERIES are the newest additions for the Photocontrol and new consumer lines.
BUSINESS CYCLE
The Company business is not seasonal or cyclical.
CUSTOMERS
The customer base consists of approximately 1,500 accounts. The loss of any
one customer would not have a material adverse financial effect on the company.
GOVERNMENT BUSINESS
The Company does business with various municipal governments and U.S
Government agencies. No significant portion of this business is subject to
renegotiation of profits or termination at the election of a governmental
agency.
NET SALES BACKLOG
The backlog at December 31, 1997 and 1996 was $3,174,000 and $3,435,000
respectively. The backlog includes orders which are deliverable over various
periods and which may be changed or cancelled in the future. However, based on
past experience, the effect of changes and cancellations is expected to be
minimal. It is anticipated that the backlog at December 31, 1997 will be filled
within the next 18 months.
COMPETITION
Rhodes' OEM and electrical distributor competition comes from the Far East
or the European sector. Consumer product competition is from China, Korea and
Mexico.
Rhodes, to compete in these areas, imports its own line of consumer
products which ranges from kitchen type timers to a complete line of
thermometers. We market through our own distributors under our Mark-Time product
name. This line was introduced in the 4th quarter of 1997 and we are estimating
an increase of 75% in consumer sales.
As part of our consolidation of timer production in Avon, it was decided to
close Rhodes Canadian assembly operation which had produced losses in 1995 and
the first half of 1996. In doing so, the second half of 1996 became profitable
and contributed to the 1997 profit picture.
I-2
<PAGE> 4
PRODUCT DEVELOPMENT
During 1997, Rhodes has been restructuring its production equipment,
engineering departments and research to produce products that will take our
Company into the year 2000 and beyond. We have invested in automatic wave
soldering equipment, electronic circuit test equipment, electronic engineers,
and in 1998 will make capital investments in automatic insertion equipment.
Rhodes has in development new concepts for the OEM equipment manufacturing of
electronic time switches that will control time, temperature, humidity, speeds
and dual switching. All are operated through user-friendly input devices. All
units will incorporate digital readouts with appropriate time ranges and signal
devices.
EMPLOYEES
As of December 31, 1997, the Company employed 123 persons, 100 are
represented by the International Association of Machinists, with the balance
being salaried employees. The Company considers its relationship with its
employees to be satisfactory.
ITEM 2. PROPERTIES
The Company owns factory, warehouse and office facilities, aggregating
92,000 square feet in Avon, Connecticut.
In the Company's opinion, this facility is adequate for the Company's
present needs.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
I-3
<PAGE> 5
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of the Company's
Executive Officers.
All Executive Officers serve for one-year terms or until their successors
are duly elected and qualified. Officers are elected annually at the meeting of
Directors, which immediately follows the Annual Meeting of Shareholders.
<TABLE>
<CAPTION>
Name Company Position, Principal Occupation
- -------------- --------------------------------------
<S> <C>
J. L. Morelli was appointed President and Chairman of the
Board in April, 1989. Previously, since
November, 1988, he was Acting General Manager,
and prior to this, Vice President of Operations
since January, 1987. From 1985 to 1987, he was
Vice President of Operations with Rapid Power
Technologies, a manufacturer of power supplies.
Age 67.
H. B. Matles has served as a Vice President of Marketing in
charge of the Company's consumer sales since
1973. Age 61.
A. D. Springer joined the Company in September, 1987 as
Controller was elected its Corporate
Controller/Treasurer in September, 1988 and
was elected its Vice President-Finance in May 1994.
Prior to joining the Company, he was with the
Arrow Hart Division of Cooper Industries for
15 years in various financial positions. His
last position was Controller. Age 58.
S. L. Vanasse has served the Company as an administrative
employee since 1977. In September, 1988, she
was elected Secretary of the Company. She
had been elected Assistant Secretary in April,
1985. Age 42.
</TABLE>
I-4
<PAGE> 6
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no generally recognized or established public trading market for
the common stock of the company.
The following chart reflects no payment of dividends over the past two
years. The source of information for the 1997 range of bid prices and ask prices
was presented by the National Quotation Bureau, LLC. For 1996, the range of bid
prices was supplied by a brokerage firm that follows the stock of the company
with no ask prices available. This information does not necessarily represent
actual transactions and may not reflect retail markups, mark-downs, or
commissions.
<TABLE>
<CAPTION>
PRICES
------
BID ASK
--- ---
High Low High Low Dividend
---- --- ---- --- --------
1997
- ----
<S> <C> <C> <C> <C> <C>
First Quarter ........... $ 2 1/2 $ 2 1/4 $ 4 1/2 $ 4 1/2
Second Quarter........... 2 1/4 2 4 1/4 3 3/4 .00
Third Quarter ........... 4 2 7 3
Fourth Quarter........... 4 1/2 4 8 1/4 7
1996
- ----
First Quarter ........... $ 6 1/4 $ 5 1/4
Second Quarter........... 6 1/4 5 1/4 Not .00
Third Quarter ........... 5 1/4 4 3/4 Available
Fourth Quarter........... 3 3/4 3 1/2
</TABLE>
As reported by the National Quotation Bureau, LLC, the bid price for the
Company stock was $4.88 and the ask price was $8.25 on March 16, 1998.
On March 16, 1998, there were approximately 660 record holders of the
Company's common stock. The number of record shareholders excludes individual
participants in security position listings.
Mellon Shareholders Services, L.L.C., 85 Challenger Rd., Overpeck Center,
Ridgefield Park, N.J. 07660 is the Company's Stock Registrar and Transfer Agent.
(1-800-288-9591)
It had been the Company's policy prior to 1988 to pay an annual dividend of
$.10 per share. Pursuant to a loan agreement between the Company and the
Connecticut National Bank (K/N/A Fleet Bank) dated December 19, 1985, now the
Wilshire Credit Corporation, the Company has covenanted that it will not declare
or pay dividends exceeding in the aggregate 10% of its annual net earnings after
taxes. Due to this agreement no dividend was declared for 1996 (payable in 1997)
and for 1997 (payable in 1998). The Company may or may not declare future
dividends depending on its earnings, financial conditions and other factors.
II-1
<PAGE> 7
ITEM 6. SELECTED FINANCIAL DATA
M. H. RHODES, INC. AND M. H. RHODES (CANADA) LIMITED CONSOLIDATED(1)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 8,493,936 $ 8,011,086 $ 8,081,871 $ 9,815,715 $10,304,525
Net income(loss) 264,968 (177,373) (895,488) 79,351 129,521
Basic earnings(loss)
per share 1.35 (.88) (4.42) .38 .62
Total assets 5,106,392 4,886,532 5,346,957 6,998,344 6,709,115
Long term
obligations 615,629 826,537 275,621 1,160,610 1,039,688
Cash dividends paid
per share .00 .00 .00 .00 .00
</TABLE>
(1) M. H. Rhodes (Canada) Limited Financial Statements have been translated
from Canadian to U.S. currency at applicable exchange rates.
II-2
<PAGE> 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
1997 Compared to 1996
Net Sales for 1997 increased 6% compared to 1996. The principal reasons for
this were: (1) an increase in U. S. government sales; (2) new product growth in
the original equipment manufacturing area; and (3) sales to customers in Canada
increased in 1997 due to the phaseout of the Canadian subsidiary in 1996 which
resulted in a decrease of shipments to the Canadian customers in the second half
of 1996.
Gross profit as a percentage of net sales was 22.3% in 1997 compared to
19.4% in 1996. The principal reasons for this were: (1) an improvement in
margins due to the increase in government and new product sales; and (2) there
were no non-cash accounting adjustments for prior years items capitalized into
inventory. As inventory decreased in 1996 and 1995, these items previously
capitalized in prior years were then charged to earnings.
Selling, General and Administrative expenses as a percentage of Net Sales
were 18.0% in 1997 compared to 20.0% in 1996 or $75,000 lower in 1997. The
principal reason for this decline was the phaseout of the active business
operations of the Canadian subsidiary at the end of 1996. As a result, the
Canadian Selling, General and Admininstrative expenses were eliminated and none
were incurred in 1997. Other contributing items were lower insurance expenses
and banking fees in 1997 than in 1996.
The decrease in interest expense was contributed by the following: (1)
$199,000 reduction in long term debt which resulted in lower interest charges;
and (2) $77,000 in lower average 1997 borrowings than 1996 for the revolving
line of credit which resulted in lower interest expense.
1996 Compared to 1995
Consolidated Net Sales for 1996 decreased by 1% compared to 1995. The
principal reason for this slight decrease was the phaseout of active business
operations in the Canadian subsidiary at the end of the fourth quarter. Canadian
sales decreased due to this phaseout in the second half of 1996 by $100,000.
Higher sales are expected in 1997 as manufacturing has been transferred to the
parent and distribution has been revised.
Gross profit as a percentage of Consolidated Net Sales was 19.4% in 1996
compared with 10.5% in 1995. The principal reasons for this were: (1) Inventory
obsolescence write-off of $50,000 compared to a 1995 write-off of $240,000. (2)
Stability in certain production lines whereas in 1995 relocation of these lines
was taking place at a cost of $46,000; (3) Significant decline in the inventory
decrease of $311,000 in 1996 compared to $1,242,000 in 1995 resulting in lower
non-cash accounting adjustments for prior years' items capitalized into
inventory that were charged to earnings for 1996 at $72,000 compared to 1995 at
$185,000; and, (4) Depreciation decreased as a result of assets being fully
depreciated.
Selling, General and Administrative expenses as a percentage of Net Sales
were 20.0% in 1996 compared to 19.5% in 1995. The principal reason for this was
higher legal fees.
II-3
<PAGE> 9
The decrease in interest expense was due to a lower bank prime rate
involving the Company's line of credit (see Note 6) and the ESOP loan (see Note
8) in 1996 compared to 1995 and decreased borrowings. During 1996, the Company
paid down principal on its' ESOP loan by $170,000. The remaining balance on the
loan as of December 31, 1996 was $680,088. The State of Connecticut was paid
$47,000 in principal during 1996 and a balance of $242,825 remains as of
December 31, 1996. The line of credit was paid down $205,224 and the balance on
December 31, 1996 was $393,755.
The increase in other expense was due to the write off of prior years'
amortization costs of $6,000.
The Net Loss for 1996 was $177,373 compared to a Net Loss of $895,488 for
1995. In summary, the principal reasons for this 1996 loss were: (1) Non-cash
accounting adjustments during the first six months of 1996 for prior years'
items capitalized into inventory; (2) Canadian losses and the closing costs of
Canada; and (3) Higher legal fees. It should be noted that both the 1996 third
quarter and fourth quarter were profitable with a Net Income of $20,000 and
$42,000 respectively.
LIQUIDITY
The Company has relied upon cash and working capital on hand to meet the
liquidity needs. The Company also established a line of credit in 1997 with
Webster Bank in the amount up to $750,000. The amount borrowed cannot exceed 80%
of acceptable accounts receivables. As of December 31, 1997, $525,212 had been
borrowed against this line.
Working capital for 1997 increased $238,000 because working capital was
generated by profitable operations and was retained for future needs.
CAPITAL RESOURCES
Capital expenditures during 1997 were $68,000, principally composed of
$40,000 in new production machinery and equipment, $13,000 in new tooling, and
$13,000 in improvements in the HVAC systems. This 1997 capital expenditure total
compares to 1996 capital expenditures of $50,000. During 1998, the Company
anticipates capital expenditures of $184,000, which will be principally used for
manufacturing cost reductions.
INFLATION
The Company believes that inflation has not had a material effect on
operations.
IMPACT OF THE YEAR 2000 ISSUE
The "Year 2000 Issue" is the result of computer software being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. The Company is in
the process of addressing the Year 2000 Issue, but has not yet completed its
assessment. The Company plans to work with computer specialists to reprogram its
current software. At the present time, no determination has been made as to
whether the Company has material Year 2000 Issues, and no estimate has been made
as to the costs to remediate such issues.
II-4
<PAGE> 10
The discussions set forth below and elsewhere herein contain certain
statements which are not historical facts and are considered forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those projected in the
forward-looking statements as a result of, among other factors, general economic
conditions and growth in the timer industry, competitive factors and pricing
pressures, changes in product mix, product demand, risk of dependence on third
party suppliers, and other risk factors detailed in this report, described from
time to time in the Company's other Securities and Exchange Commission filings,
or discussed in the Company's press releases. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted on pages II-7 thru II-19 of this
report.
II-5
<PAGE> 11
(RIGGS & ASSOCIATES LETTERHEAD)
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of M. H. Rhodes, Inc.:
We have audited the accompanying consolidated balance sheets of M. H. Rhodes,
Inc. and subsidiary as of December 31, 1997 and 1996 and the related
consolidated statements of operations, non-redeemable common stock, retained
earnings and other stockholders' equity and cash flows for each of the three
the years ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of M. H. Rhodes, Inc.
and subsidiary as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/ Riggs & Associates, LLP
--------------------------------------
Riggs & Associates, LLP
Hartford, Connecticut
February 23, 1998
One State Street
Hartford, CT 06103
Telephone (860) 549-8500
FAX (860) 549-8501
II-6
<PAGE> 12
M.H. RHODES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 21,786 $ 137,750
Accounts Receivable, net of allowance
for doubtful accounts of $15,079 in
1997 and $26,670 in 1996 1,312,189 1,091,401
Inventories 2,999,584 2,839,417
Prepaid Expenses and Other 32,776 38,716
----------- -----------
TOTAL CURRENT ASSETS 4,366,335 4,107,284
NET PROPERTY, PLANT AND EQUIPMENT 721,328 759,042
OTHER ASSETS 18,729 20,206
----------- -----------
TOTAL ASSETS $ 5,106,392 $ 4,886,532
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable $ 525,212 $ 393,755
Current Portion of Long-term Debt 267,720 256,173
Accounts Payable 469,406 531,843
Other Accrued Expenses 261,688 321,295
----------- -----------
TOTAL CURRENT LIABILITIES 1,524,026 1,503,066
LONG-TERM DEBT, less current portion 515,629 726,537
OTHER NON-CURRENT LIABILITIES 100,000 100,000
COMMITMENTS AND CONTINGENCIES -- --
Redeemable Common Stock 625,256 549,907
STOCKHOLDERS EQUITY:
Common Stock, $1.00 par value, 400,000
shares authorized, 300,880 issued and
121,585 and 129,278 shares outstanding
in 1997 and 1996, respectively 225,729 227,559
Paid-in Capital 3,697 3,697
Retained Earnings 3,695,734 3,504,285
Less: Treasury Stock, at cost, 104,144
and 98,281 shares in 1997 and
1996, respectively (1,092,404) (1,048,431)
Unallocated ESOP shares (491,275) (680,088)
----------- -----------
$ 5,106,392 $ 4,886,532
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
II-7
<PAGE> 13
M. H. RHODES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 8,493,936 $ 8,011,086 $ 8,081,871
COST OF SALES 6,602,617 6,458,508 7,231,797
----------- ----------- -----------
Gross profit 1,891,319 1,552,578 850,074
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,526,354 1,600,849 1,577,616
----------- ----------- -----------
Operating income (loss) 364,965 (48,271) (727,542)
OTHER INCOME(EXPENSE):
INTEREST EXPENSE (98,328) (132,448) (159,177)
OTHER INCOME, (EXPENSE) net 7,331 (4,106) 1,873
----------- ----------- -----------
(90,997) (136,554) (157,304)
----------- ----------- -----------
Income (loss) before
income taxes 273,968 (184,825) (884,846)
INCOME TAX EXPENSE (BENEFIT) 9,000 (7,452) 10,642
----------- ----------- -----------
Net income (loss) $ 264,968 $ (177,373) $ (895,488)
----------- ----------- -----------
Basic earnings (loss) per share $ 1.35 $ (.88) $ (4.42)
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 196,225 202,612 202,599
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
II-8
<PAGE> 14
M. H. RHODES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF NON-REDEEMABLE COMMON STOCK, RETAINED EARNINGS
AND OTHER STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------ Paid-in Retained -------------- Unallocated
Shares Par Value Capital Earnings Shares Cost ESOP Shares
------ --------- ------- -------- ------ ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 243,324 $243,324 $3,697 $4,672,341 92,750 $(1,000,035) $(1,020,072)
Net loss -- -- -- (895,488) -- -- --
ESOP Expense -- -- -- -- -- -- 169,992
Translation adjustments -- -- -- 7,895 -- -- --
Redeemable common stock (11,036) (11,036) -- (71,734) -- -- --
Purchase of treasury stock -- -- -- -- 5,531 (48,396) --
------- -------- ------ ---------- ------- ----------- -----------
Balance, December 31, 1995 232,288 232,288 3,697 3,713,014 98,281 (1,048,431) (850,080)
Net Loss -- -- -- (177,373) -- -- --
ESOP Expense -- -- -- -- -- -- 169,992
Redeemable common stock (4,729) (4,729) -- (30,738) -- -- --
Translation adjustments -- -- -- (618) -- -- --
------- -------- ------ ---------- ------- ----------- -----------
Balance, December 31, 1996 227,559 227,559 3,697 3,504,285 98,281 (1,048,431) (680,088)
Net income -- -- -- 264,968 -- -- --
ESOP Expense -- -- -- -- -- -- 188,813
Redeemable common stock (1,830) (1,830) -- (73,519) -- -- --
Purchase of treasury stock -- -- -- -- 5,863 (43,973) --
------- -------- ------ ---------- ------- ----------- -----------
Balance, December 31, 1997 225,729 $225,729 $3,697 $3,695,734 104,144 $(1,092,404) $ (491,275)
======= ======== ====== ========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
II-9
<PAGE> 15
M. H. RHODES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 264,968 $ (177,373) $ (895,488)
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization 107,717 137,057 178,190
ESOP expense 188,813 169,992 169,992
Loss on sale of assets -- 559 --
Translation adjustments -- (618) 7,895
Change in assets and liabilities:
Accounts receivable (220,788) 160,809 296,793
Inventories (160,167) 310,845 1,241,561
Accounts payable, accrued expenses
and other, net (119,836) (3,475) (628,369)
----------- ----------- -----------
Net cash provided by
operating activities 60,707 597,796 370,574
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (68,744) (50,459) (16,334)
Proceeds from sale of property and
equipment 3,950 3,377 --
----------- ----------- -----------
Net cash used in investing
activities (64,794) (47,082) (16,334)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from additional borrowings 2,344,396 7,698,882 7,973,328
Repayment of debt (2,412,300) (8,144,348) (8,252,831)
Purchase of treasury stock (43,973) -- (48,396)
----------- ----------- -----------
Net cash used in financing
activities (111,877) (445,466) (327,899)
----------- ----------- -----------
Net Increase(decrease) in cash (115,964) 105,248 26,341
CASH AND CASH EQUIVALENTS, beginning of year 137,750 32,502 6,161
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 21,786 $ 137,750 $ 32,502
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
II-10
<PAGE> 16
M. H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - GENERAL:
The Company manufactures timing devices and photoelectric lighting
controls primarily for sale to distributors and original equipment
manufacturers. These products are sold primarily in North America.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements include
the accounts of M.H. Rhodes, Inc. (the Company) and its substantially
wholly owned subsidiary, M.H. Rhodes (Canada) Limited. All significant
intercompany balances and transactions have been eliminated. As of
September 30, 1996 operations ceased at M. H. Rhodes (Canada) Limited and
the Board of Directors voted for its dissolution which is currently in
process. Remaining assets were transferred to the Parent company during
1996.
Foreign Currency Translation - The financial statements of M.H. Rhodes
(Canada) Limited have been translated from Canadian to U.S. currency at
the applicable exchange rates. There were no material accumulated
translation adjustments recorded directly in a separate component of
stockholders' equity for any of the years presented.
Cash and Cash Equivalents - For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments with a maturity
of three months or less to be cash equivalents.
Inventories - Inventories are valued at the lower of cost or market using
the first-in, first-out method of accounting. Appropriate estimates
are established to reduce inventory for slow moving and obsolete items.
Property, Plant and Equipment - Depreciation is provided using straight-
line and accelerated methods over estimated useful lives which range from
10 to 40 years for buildings and improvements and 3 to 10 years for
machinery and equipment.
Revenue Recognition - Revenues from sales of timing devices and
photoelectric lighting controls are generally recognized upon delivery to
the customer. Such revenue is recorded net of estimated product return.
For the years ended December 31, 1997, 1996, and 1995, such estimated
amounts for the returns were not considered material.
Per Share Data - Net income (loss) per share is reported in conformity with
the Financial Accounting Standards Board (FASB) Statement 128. Statement
128 supersedes APB Opinion No. 15, Earnings Per Share and specifies the
computation, presentation, and disclosure requirements for earnings per
share ("EPS") for entities with publicly held common stock. In accordance
with the statement, the Company has adopted this statement for the year
ended December 31, 1997 and has restated prior year EPS calculations to
conform with the new pronouncement (see Note 10).
II-11
<PAGE> 17
M.H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (continued):
Income Taxes - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
which these temporary differences are settled. The effect on deferred tax
assets and liabilities of a change in the tax rate is recognized in income
in the period that includes the enactment date of rate change.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally
of trade receivables. The Company performs on going credit evaluations of
its customers and generally does not require collateral. The Company
estimates reserves for potential credit losses. As of December 31, 1997,
accounts receivable to one customer represented 13% of total accounts
receivable. There were no sales to any one customer greater than 10%
during fiscal year 1997, 1996 and 1995. There were no concentrations of
accounts receivable with one customer at December 31, 1996.
Fair Values of Financial Instruments - The Company values financial
instruments as required by Statement of Financial Accounting Standards No.
107, "Disclosure about Fair Values of Financial Instruments." The carrying
amounts of cash and cash equivalents, accounts receivable, and current
liabilities approximate fair value.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from
those estimates.
NOTE 3 - INVENTORIES:
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials and component parts $1,532,009 $1,576,083
Work-in-process 1,142,911 843,654
Finished goods 324,664 419,680
---------- ----------
$2,999,584 $2,839,417
---------- ----------
</TABLE>
II-12
<PAGE> 18
M. H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 4 - NET PROPERTY, PLANT AND EQUIPMENT:
Property, Plant and Equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Buildings and improvements $1,273,555 $1,270,698
Machinery and equipment 2,565,253 2,529,388
Land 65,000 65,000
Construction in progress 8,250
---------- ----------
3,903,808 3,873,336
Less: Accumulated depreciation 3,182,480 3,114,294
---------- ----------
$ 721,328 $ 759,042
---------- ----------
</TABLE>
NOTE 5 - INCOME TAXES:
The components of the provision (benefit) for income taxes at December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal -- -- --
State 9,000 7,106 10,642
----- ------- ------
Total current 9,000 7,106 10,642
Deferred:
Federal -- (14,558) --
State -- -- --
----- ------- ------
Total deferred -- (14,558) --
----- ------- ------
9,000 (7,452) 10,642
===== ======= ======
</TABLE>
Income tax expense represents the state minimum taxes, and therefore there
is no difference between actual and the expected tax expense, computed at
appropriate statutory rates.
The Company has approximately $1,430,000 of net operating loss
carryforwards available to reduce taxable income for Federal income tax
reporting purposes which expire between 2003 and 2011. For State income
tax purposes, the Company's net operating loss carryforwards are
approximately $605,000, which expire between 1998 and 2001.
II-13
<PAGE> 19
M. H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 5 - INCOME TAXES (continued):
Deferred tax assets and liabilities at December 31 resulted from the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Receivables $ 4,957 $ 8,818
Inventory 67,364 43,957
Federal tax loss carryforwards 357,287 457,891
State tax loss carryforwards 63,571 110,561
--------- ---------
493,179 621,227
Less: Valuation allowance (290,291) (280,353)
--------- ---------
Total deferred tax assets 202,888 340,874
Deferred tax liabilities:
Deferred compensation 194,474 261,409
Property, plant and equipment 7,412 43,415
Investment in subsidiary -- 35,418
Debt issue costs 1,002 632
--------- ---------
Total deferred tax liabilities 202,888 340,874
--------- ---------
Net deferred tax liabilities $ -- $ --
========= =========
</TABLE>
The Company paid approximately, $8,200, $8,200 and $10,900 for income taxes for
1997, 1996 and 1995 respectively.
NOTE 6 - NOTES PAYABLE:
On April 3, 1997, the Company entered into a commercial revolving line of
credit with Webster Bank for a principal amount of up to $750,000, the
proceeds of which were used to pay off the previous outstanding working
capital liability. Interest is paid monthly at the bank's prime rate (8.50%
at December 31, 1997) plus 2.0% and principal is due upon the loan's
termination on June 1, 1998. The note is collateralized by all tangible and
intangible personal property of the Company except for the lien on the
Company's machinery and equipment in favor of DECD. The revolving line of
credit contains several financial covenants primarily related to the
leverage ratio, current ratio, debt service coverage ratio, minimum tangible
net worth, trade payables days and payment of dividends. The Company was in
compliance with the respective covenants as of and for the year ended
December 31, 1997. At December 31, 1997, the Company had a note payable of
$525,212 under this credit line.
II-14
<PAGE> 20
M. H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 6-NOTES PAYABLE (continued)
At December 31, 1996, the Company had a note payable of $393,755 under an
accounts receivable asset backed revolving loan not to exceed the lesser of
$650,000 or 75% of acceptable accounts receivables. Interest is paid monthly
at the bank's prime rate (8.25% at December 31. 1996) plus 1.5% and
principal is due upon the collection of accounts receivable backing the
outstanding advances. The revolving loan expired April 3, 1997. The note was
guaranteed by M.H. Rhodes (Canada) Limited, and collateralized by a life
insurance policy on a key officer of the Company, and by all other assets of
the Company. The Company was charged interest at a minimum base borrowing of
$400,000 even if outstanding borrowings fell below that threshold.
NOTE 7 - LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Mortgage note payable (ESOP) due in
monthly principal installments of
$14,166, plus interest at 82.5%
of the bank's prime rate through
December, 2000 (see Note 8) $510,096 $680,088
Term note payable to State of
Connecticut with interest at 6.5%
due in monthly principal and
interest installments of
$5,323 commencing in February,
1995 through January, 2001 192,707 242,825
Obligations under ESOP stock repurchase
agreements with certain former
employees due in annual installments
plus interest at approximately 8%
(see Note 8) 80,546 59,797
-------- --------
783,349 982,710
-------- --------
Less - Current portion 267,720 256,173
-------- --------
$515,629 $726,537
-------- --------
</TABLE>
II-15
<PAGE> 21
M. H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 7 - LONG-TERM DEBT (continued):
Aggregate principal payments of long-term debt for the next five years are
as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998 $ 267,720
1999 249,670
2000 240,007
2001 25,952
2002 --
----------
$ 783,349
----------
</TABLE>
The mortgage note payable contains various financial covenants primarily
related to the current ratio, net worth, leverage rate, current maturity of
long-term debt ratio and restrictions on payment of dividends. The Company
was in compliance with the respective covenants as of and for the year ended
December 31, 1997.
The Company has received $400,000 in financial assistance from the State of
Connecticut, Department of Economic Development (The State) on March 24,
1994. The State provided a $300,000 loan and a $100,000 grant to be used for
new product tooling and equipment. The $100,000 grant, which is classified
as other non-current liabilities in the accompanying balance sheet, requires
the fulfillment of certain conditions as set forth in the grant agreement.
Failure to fulfill the conditions could result in the return of funds to the
State along with a penalty charge of 7.5% per annum, per year the grant is
outstanding.
The Company paid approximately $97,381, $135,661 and $173,388 for interest
in 1997, 1996 and 1995, respectively.
NOTE 8 - EMPLOYEE STOCK OWNERSHIP PLAN:
Description - The Company established a non-contributory Employee Stock
Ownership Plan (the ESOP) for qualified non-union employees effective
January 1, 1983, initially contributing $50,000 and 5,000 shares of Company
stock. In 1985 the Company borrowed, in the form of a mortgage note payable,
$2,550,000 which was loaned to the ESOP upon which the ESOP purchased 96,461
shares of the Company's stock at a value of $28 per share. At the time of
the purchase, the Company recognized the value of these shares as a
reduction of stockholder's equity. Contributions to to the ESOP are based
upon the payment terms of the mortgage note payable, resulting in ESOP
expense of $169,992 per year. For 1997, the Company contributed an
additional $18,821, resulting in a total contribution of $188,813.
II-16
<PAGE> 22
M. H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 8: EMPLOYEE STOCK OWNERSHIP PLAN (continued):
Interest expense for the related note payable was $43,172, $65,495 and
$69,781 in 1997, 1996, and 1995 respectively.
The ESOP allows salaried employees to earn shares of the Company's stock
while they are employed by the Company. Upon the cessation of their
employment, former employees can require the Company to purchase their
vested shares at an appraised value ($8.32 per share at December 31, 1996),
payable over a five-year period. The amount owed to such former employees is
based upon stock presented to the Company and is included in noted payable
for those shares that have been presented (see Note 7).
Shares of the plan are released for allocation to participants as
compensation expense based on annual principal payments of $169,992 made on
the ESOP debt, except for the year ended 1997 in which the contribution was
$188,813. At December 31, 1997, 78,956 shares have been released
(allocated), 5,423 shares are committed to be released (allocated) and
12,682 shares are unallocated. The value of unearned ESOP shares at December
31, 1997 is estimated to be $105,514.
Redeemable Common Stock - In connection with the ESOP, 75,151 and 73,321
shares of $1.00 par value common stock have been classified as redeemable at
December 31, 1997 and 1996 respectively. The amount recorded for these
shares is $625,256 and $549,907 at December 31, 1997 and 1996 respectively
and is based upon the latest available appraised value of the Company's
stock. These shares represent common stock held by employees with the right
to put those shares to the Company (as described above) upon cessation of
their employment; virtually all shares have been vested as of December 31,
1997. Each year the change in per share value is recorded as an adjustment
to retained earnings.
NOTE 9 - PENSION PLAN:
Under the terms of an agreement with the International Association of
Machinists, the Company contributes specified amounts to union-administered
pension funds. Contributions were $47,264, $45,189 and $28,397 in 1997, 1996
and 1995 respectively. Since this plan is a multiemployer plan, actuarial
present values of accumulated plan benefits and other information for a
particular employer are not available.
II-17
<PAGE> 23
M. H. RHODES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 10 - EARNINGS PER SHARE:
Basic earnings per share is computed by dividing income available to common
stockholders (the numerator) by the weighted average number of common shares
actually outstanding (the denominator) during the period. Shares issued during
the period and shares reacquired during the period shall be weighted for the
portion of the period that they were outstanding.
Earnings per share for the Company at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Basic EPS Calculation:
----------------------
<S> <C> <C> <C>
Net income (loss) $ 264,968 $(177,373) $(895,488)
Weighted average shares
outstanding:
Common stock 99,675 99,675 99,675
Redeemable common stock 73,326 68,605 57,586
Employee stock ownership plan 125,360 132,613 141,831
Less: Treasury stock (102,136) (98,281) (96,493)
--------- --------- ---------
196,225 202,612 202,599
========= ========= =========
Basic EPS $ 1.35 $ (0.88) $ (4.42)
========= ========= =========
</TABLE>
NOTE 11 - NEW ACCOUNTING PRONOUNCEMENTS:
During 1997, The Financial Accounting Standards Board (FASB) issued several
Statements of Financial Accounting Standards (Statements) which are pending
implementation by the Company. They are as follows:
Statement 130 - Reporting Comprehensive Income - Statement 130 establishes
standards for reporting comprehensive income. The Statement defines
comprehensive income as the change in equity of an enterprise except those
resulting from shareholder transactions. All components of comprehensive
income are required to be reported in a new financial statement that is
displayed with equal prominence as existing financial statements. The
Company will be required to adopt this statement during 1998. As the
Statement addresses reporting presentation issues only, there will be no
impact on earnings from its adoption.
Statement 131 - Disclosures about Segments of an Enterprise and Related
Information - Statement 131 establishes standards for related disclosures
about the products and services, geographic areas and major customers of an
enterprise. The Company will be required to adopt this Statement for
financial statements during 1998. As this Statement addresses reporting
disclosure issues only, there will be no impact on earnings from its
adoption.
II-18
<PAGE> 24
NOTE 12 - COMMITMENTS & CONTINGENCIES:
Commitments - The Company has consulting agreements with certain retirees of
the Company. Payments (including health insurance premiums) under this
contract (aggregating approximately $50,000 on an annual basis) represent
compensation for current as well as potential past services; however the
Company has determined that any liability for past services is immaterial.
The Company has also entered into a new employment agreement with Joseph
Morelli, President and has rescinded all prior agreements. The new
employment agreement contains retirement benefits that will be earned over
the term of the agreement resulting in charges to the Company's financial
statements beginning January 1, 1998.
Contingencies - The Company is in the process of addressing the Year 2000
issue. The Company plans to work with computer specialists to reprogram its
current software. At the present time, no estimate has been made as to the
costs to remediate its Year 2000 issue.
The Company has determined that an environmental issue exists on the Company
property. Management believes that any known levels of contamination would
be below that which would require current remediation. However, if the
property were to be sold or transferred, remediation would probably be
required and the costs of remediation may be material. No estimate can be
made at this time.
ITEM 9. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
None.
II-19
<PAGE> 25
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
Information concerning Executive Officers is included at the end of Part I
of this Form 10-K.
The following table sets forth the names and ages of the Company's
Directors:
<TABLE>
<CAPTION>
Year First
Name Elected Business Experience
- ---- ---------- -------------------
<S> <C> <C>
A. J. Campanelli 1978 Mr. Campanelli is the Director of Business
Development for Webster Bank. Previously he
retired from Shawmut National Bank in 1992,
where he had been a Senior Vice President
since 1977. Age 62.
E. J. Doyle 1985 Mr. Doyle retired from the Company in 1989.
He stepped down as President of the Company
in 1987 and assumed a position as one of the
Company's Vice Presidents as an Account Exec-
utive until his retirement. He had served as
President of the Company since 1985.
Previously, he had been Vice President of the
Company since 1953. Age 77.
J. T. Mayerhofer 1997 Mr. Mayerhofer has been a principal of J.T.M.
Associates, a Consulting Firm focused on
small company productivity and profit im-
provement, since 1994. Prior to this, Mr.
Mayerhofer was President and Chief Executive
Officer of Knowaste North America, a start-up
venture for the recycling of personal care
products between 1993-1994. Before this, he
was with The Dexter Corporation for 10 years.
His last four being President and Corporate
Vice President for the Specialty Materials
and Services Group. This Group manufactured
and distributed nonwovens, magnetic material
and water treatment services. Age 53.
J. L. Morelli 1989 Mr. Morelli was appointed President and
Chairman of the Board in 1989. Previously,
since 1988, he had been Acting General Manager,
and prior to this, he had been Vice President
of Operations since 1987. From 1985 to 1987, he
was Vice President of Operations with Rapid
Power Technologies, manufacturers of power
supplies. Between 1978 and 1985, he served as
Executive Vice President and Vice President of
Operations for Napco, Division of
Thermo-Electron, manufacturers of autoplating
equipment. Age 67.
</TABLE>
III-1
<PAGE> 26
ITEM 10. DIRECTORS OF THE REGISTRANT (continued):
<TABLE>
<S> <C> <C>
J. W. Pogmore 1997 Mr. Pogmore has been President of the Cramer
Company since 1989. Cramer is a major manu-
facturer of sub-fractional horsepower gear
motors. Prior to that, from 1985 to 1989,
Mr. Pogmore was President of Measurement Sys-
tems, Inc., a leading manufacturer of elec-
tronic components and controls serving pri-
marily information processing, medical and
defense industries. Before becoming Presi-
dent, he was Vice President of Marketing, di-
recting world-wide sales functions. Age 62.
</TABLE>
All directors serve for one-year terms or until their successors are duly
elected and qualified. Directors are elected annually at the Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Compensation - Executive Officers
No officer of the Company was paid cash compensation in excess of $100,000
in 1997. All executive officers as a group (4 persons) received $291,778 for the
year ended December 31, 1997. The information concerning Mr. Morelli's
compensation is required to be disclosed because of his position as Chief
Executive Officer, notwithstanding that his salary and bonus did not exceed
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Annual Compensation All Other
Principal Position Year Salary($) Bonus($) Compensation(1)
------------------ ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Joseph L. Morelli 1997 $99,585 -0- $24,896
Chairman of the Board 1996 $97,405 -0- $16,944
and Chief Executive Officer 1995 $94,474 -0- $15,446
</TABLE>
(1) Includes amounts allocated under the Company's Employee Stock Ownership
Plan during 1997 as a result of Company contributions and interest earned on
plan assets including previously allocated shares of the Company. As of
January 1, 1998 the vested interest for Mr. Morelli was 100%.
III-2
<PAGE> 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the beneficial ownership of the common stock of
the Company as of March 16, 1998 by each person who is known by the Company to
own beneficially more than 5% of the common stock, by each director of the
Company and by all officers and directors as a group, is set forth in the
following table:
<TABLE>
<CAPTION>
Amount and
Name of Nature of
Title of Beneficial Beneficial Percent of
Class Owner Ownership (1) Class
-------- ---------- ------------- ----------
<S> <C> <C> <C>
Common Stock M. H. Rhodes, Inc. Employee 91,355 46.44
Stock Ownership Trust for
Non-Bargaining Unit Employee
Group (2)
Common Stock A. J. Campanelli - -
Common Stock E. J. Doyle 2,025 1.03
Common Stock J. T. Mayerhofer - -
Common Stock J. L. Morelli 7,860 4.00
Common Stock J. W. Pogmore - -
Common Stock All Officers and Directors
(8) as a group 31,663 16.09
</TABLE>
(1) Record ownership unless otherwise indicated.
(2) Mailing address: 99 Thompson Road, Avon, Connecticut 06001
(3) Includes shares allocated to ESOP accounts respectively for Mr. Morelli
(7,860) and all other Officers and Directors as a group (20,278).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
III-3
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as a part of this report:
<TABLE>
<CAPTION>
1. Financial Statements Page No.
-------------------- --------
<S> <C>
The following Consolidated Financial Statements of M.H.
Rhodes, Inc. and Subsidiaries are included in Item 8: II-5
Opinion of Independent Public Accountants. II-6
Consolidated Balance Sheets - December 31, 1997 and 1996. II-7
Consolidated Statements of Operations -
Years ended December 31, 1997, 1996 and 1995. II-8
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1997, 1996 and 1995. II-9
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, 1996 and 1995. II-10
Notes to Consolidated Financial Statements. II-11-19
</TABLE>
2. Supplementary Data and Financial Statements Schedules
-----------------------------------------------------
All Schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
Financial Statements or Notes thereto.
Separate Financial Statements and Supplemental Schedules of the Company are
omitted since the Company is primarily an operating Company and its
subsidiary, included in the Consolidated Financial Statements being filed,
does not have a minority equity interest or indebtedness to any person
other than the Company in an amount which exceeds five percent of the total
assets as shown by the Consolidated Financial Statements as filed herein.
IV-1
<PAGE> 29
3. Exhibits Cross Reference Information
-------- ---------------------------
(3) Articles of Incorporation and By-Laws Filed as Exhibit to Form
10 filed on April 27, 1965
(4A) Specimen Common Stock Certificate Filed as Exhibit 4A to
Form 10-K, File No. 0-1412
dated March 25, 1987.
(4B) Loan Agreement, Term Loan Note and
Open End Mortgage Between the Company
and The Connecticut National Bank **
dated December 19, 1985
(4C) Loan Agreement 5-Year Term Loan Note Filed as Exhibit 4C to
and Open End Mortgage Between the Form 10-K, File No. 0-1412
Company and The Connecticut National dated March 27, 1990.
Bank dated December 7, 1989
(4D) Loan Agreement, Eighteen month Filed as Exhibit 4D to
Accounts Receivable Asset Backed Form 10-K, File No. 0-1412
Revolver between the Company and dated March 30, 1994.
Affiliated Business Credit Corporation
dated October 21, 1993.
(4E) Loan Agreement/Grant, 7-year loan Filed as Exhibit 4E to
between the Company and the State of Form 10-K, File No. 0-1412
Connecticut, dated March 24, 1994. dated March 30, 1994.
(4F) Loan Modification Agreement, Term Loan Filed as Exhibit 4F to
Note and Open End Mortgage Between the Form 10-K, File No. 0-1412
Company and The Connecticut National dated March 30, 1994.
Bank (K/N/A Shawmut Bank) dated
December 19, 1985, modified on
October 21, 1993.
(4G) Commercial Revolving Loan and Security Page 33 to 62
Agreement, between the Company and
Webster Bank, dated April 3, 1997.
(11) Statement re: computation per share earnings filed with this report
(16) Letter re: Change in certifying Accountants Pg. filed as Exhibit 16
to form 10-K, File No. 0-1412 dated March 30, 1994
(21) Subsidiaries of Company filed with this report
** Incorporated by reference in Exhibit 4 to Schedule 13D, dated December
27, 1985, filed by M. H. Rhodes, Inc. Employee Stock Ownership Trust for the
Non-Bargaining Unit Employee Group of the M. H. Rhodes, Inc. Employee Stock
Ownership Plan for the Non-Bargaining Unit Employee Group. This Schedule 13D was
filed with the SEC on December 30, 1985. Exhibit 4 is found at pages 98, et seq.
of such filing in accordance with the sequential numbering system.
IV-2
<PAGE> 30
B. Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the last quarter
of the period covered by this report.
IV-3
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
M. H. RHODES, INC.
By:______________________________________
Joseph L. Morelli, President
and Chief Executive Officer
March , 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant, and in the capacities and on the dates indicated.
By:______________________________________
Joseph L. Morelli, President
and Chief Executive Officer
March , 1998
By:______________________________________
Allan D. Springer, Vice President
Finance and Chief Financial
Officer/Principal Accounting
Officer
March , 1998
By:______________________________________
Edward J. Doyle, Director
March , 1998
By:______________________________________
Anthony J. Campanelli, Director
March , 1998
By:______________________________________
James T. Mayerhofer, Director
March , 1998
By:______________________________________
James W. Pogmore, Director
March , 1998
<PAGE> 32
EXHIBIT INDEX
Sequential Numbering
System, Page number or
Exhibit Number Cross Reference Information
- -------------- ---------------------------
(3) Articles of Incorporation and By-Laws Filed as Exhibit to Form
10 filed on April 27, 1965
(4A) Specimen Common Stock Certificate Filed as Exhibit 4A to
Form 10-K, File No. 0-1412
dated March 25, 1987.
(4B) Loan Agreement, Term Loan Note and
Open End Mortgage Between the Company
and The Connecticut National Bank **
dated December 19, 1985
(4C) Loan Agreement 5-Year Term Loan Note Filed as Exhibit 4C to
and Open End Mortgage Between the Form 10-k, File No. 0-1412
Company and The Connecticut National dated March 27, 1990.
Bank dated December 7, 1989
(4D) Loan Agreement, Eighteen Month Filed as Exhibit 4D to
Accounts Receivable Asset Backed Form 10-K, File No. 0-1412
Revolver between the Company and dated March 30, 1994.
Affiliated Business Credit
Corporation dated October 21, 1993.
(4E) Loan Agreement/Grant, 7-year loan Filed as Exhibit 4C to
between the Company and the State Form 10-K, File No. 0-1412
of Connecticut, dated March 24, 1994. dated March 30, 1994.
(4F) Loan Modification Agreement, Term Loan Filed as Exhibit 4D to
Note and Open End Mortgage Between the Form 10-K, File No. 0-1412
Company and The Connecticut National dated March 30, 1994.
Bank (K/N/A Shawmut Bank) dated
December 19, 1985, modified on
October 21, 1993.
(4G) Commercial Revolving Loan and Security Page 33 to 62
Agreement, between the Company and
Webster Bank, dated April 3, 1997.
(11) Statement re: computation per share earnings filed with this report
(16) Letter re: Change in certifying Accountants Pg. filed as Exhibit
16 to form 10-K, File No. 0-1412 dated March 30, 1994
(21) Subsidiaries of Company filed with this report
** Incorporated by reference in Exhibit 4 to Schedule 13D, dated
December 27, 1985, filed by M. H. Rhodes, Inc. Employee Stock Ownership Trust
for the Non-Bargaining Unit Employee Group of the M. H. Rhodes, Inc. Employee
Stock Ownership Plan for the Non-Bargaining Unit Employee Group. This Schedule
13D was filed with the SEC on December 30, 1985. Exhibit 4 is found at pages 98,
et seq. of such filing in accordance with the sequential numbering system.
<PAGE> 1
EXHIBIT 4(G)
COMMERCIAL REVOLVING LOAN AND SECURITY AGREEMENT
------------------------------------------------
Commercial Revolving Loan and Security Agreement dated April 3, 1997 by
and between M.H. RHODES, INC., a Delaware corporation with its chief executive
office and principal place of business located at 99 Thompson Road, Avon, 06001
Connecticut (the "Borrower"), and WEBSTER BANK, a banking institution having an
office at One Hundred Constitution Plaza, 17 Floor, Suite 1710, Hartford,
Connecticut (the "Bank").
PREAMBLE
--------
WHEREAS, the Borrower have requested the Bank to extend to it a
discretionary commercial revolving loan facility in the principal amount of up
to $750,000; and
WHEREAS, the Bank has agreed to extend the aforesaid facility on the terms
and subject to the conditions set forth below.
NOW, THEREFORE, for the mutual considerations contained in this Agreement,
the Borrower and the Bank agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.1 Certain Defined Terms. As used herein, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Account Debtor" shall mean the person or entity obligated to the
Borrower upon an Account.
"Accounts" shall mean all accounts, as that term is defined in
Article 9 of the UCC, and all other accounts, accounts receivable, contract
rights, Chattel Paper, Documents, Instruments, deposit accounts, General
Intangibles and other obligations and receivables of any kind, now or hereafter
existing, whether or not arising out of or in connection with the sale or lease
of goods or the rendering of services, whether or not earned by performance,
and whether or not the same are listed on any schedules, assignments or reports
furnished to the Bank from time to time, and all rights now or hereafter
existing in and to all security agreements, leases, and other contracts securing
or otherwise relating to any such accounts, contract rights, Chattel Paper,
Instruments, deposit accounts, General Intangibles and other obligations and
receivables, together with all goods, Inventory and merchandise returned or
reclaimed by or repossessed from customers wherever such goods, Inventory and
merchandise are located, and all Proceeds thereof, whether cash Proceeds,
Proceeds of insurance or otherwise, and all notes, drafts, letters of credit,
guaranties, securities and Liens which the Borrower may hold for the payment of
any such Accounts, including, without limitation, all rights of rescission,
replevin, reclamation and stoppage in transit and all other rights and remedies
of an unpaid vendor or lienor, and any Liens held by the Borrower as a
mechanic, contractor, subcontractor, processor, materialman, machinist,
manufacturer, artisan, or otherwise.
"Advance" shall have the meaning assigned in Section 2.1 hereof.
"Agreement" shall mean this Commercial Revolving Loan and Security
Agreement as the same may from time to time be amended, supplemented or
otherwise modified.
"Assignment of Life Insurance Policy as Collateral" shall mean that
certain Assignment of Life Insurance Policy as Collateral of even date herewith
between Borrower and Lender with respect to a $250,000 Term Life Insurance
Policy insuring the life of Joseph L. Morelli.
<PAGE> 2
"Borrower's Account" shall mean the account of the Borrower maintained by
the Borrower with the Bank at its office at One Hundred Constitution Plaza,
Hartford, Connecticut, Account No. 0008860736.
"Borrowing Base" shall mean, at any given time, eighty percent (80%) of the
value of Borrower's Eligible Accounts as shall be determined by the Bank in its
sole reasonable discretion in accordance with its customary business practice
and regular criteria taking into consideration, among other factors, their book
value (before bad debt reserves) determined in accordance with GAAP.
"Borrowing Base Certificate" shall have the meaning assigned in Section
8.1(a) hereof.
"Borrowing Base Deficiency" shall mean, on any day, the failure of (i) the
Borrowing Base at the close of business on the immediately preceding Business
Day to equal or exceed (ii) the aggregate principal amount of all Advances
outstanding on such day.
"Business Day" shall mean any day other than a day on which commercial
banks in Hartford, Connecticut are required or permitted by law to close.
"Capital Assets" shall mean assets that are depreciated or amortized on
the Borrower's balance sheet in accordance with GAAP.
"Capital Expenditures" shall mean, for any period, the aggregate amount of
all actual expenditures for the acquisition, construction, improvement,
replacement or purchase of Capital Assets and Intangible Assets, including, but
not limited to, expenditures under Capital Leases.
"Capital Leases" shall mean capital leases, conditional sales contracts
and other title retention agreements relating to the purchase or acquisition of
assets that in accordance with GAAP are required or permitted to be depreciated
or amortized on Borrower's balance sheet.
"Chattel Paper" shall mean all chattel paper, as that term is defined in
Article 9 of the UCC, and, in any event, shall include any writing or writings
which evidence both a monetary obligation and a security interest in or a lease
of specific goods, whether now or hereafter held by the Borrower.
"Collateral" shall mean the property of the Borrower described in Section
9.1 hereof.
"Commitment Amount" shall mean SEVEN HUNDRED AND FIFTY THOUSAND AND
NO/100 DOLLARS ($750,000).
"Contracts" shall mean all contracts, undertakings, franchise agreements
or other agreements (other than rights evidenced by Chattel Paper, Documents or
Instruments, as those terms are defined above and below) in or under which the
Borrower may now or hereafter have any right, title or interest, including,
without limitation, with respect to an Account, and any agreement relating to
the terms of payment or the terms of performance thereof.
"Cost of Sales" shall mean, for any period, the Borrower's total cost of
sales for such period determined in accordance with GAAP.
"Current Maturity of Long-Term Debt" shall mean the current maturity of
long term Indebtedness paid or payable during the applicable period, including,
but not limited to, amounts required to be paid or payable during such period
under Capital Leases.
"Current Ratio" shall mean that quotient equal to (i) Total Current
Assets, divided by (ii) Total Current Liabilities.
-2-
<PAGE> 3
"Debt Service Coverage Ratio" shall mean that quotient equal to net profit
after taxes plus depreciation expense and amortization expense, all as
determined in accordance with GAAP (using the FIFO inventory valuation method
for such period), divided by Current Maturity of Long-Term Debt less the amount
of principal payments made by Borrower on the ESOT Loan (up to a maximum annual
amount of $170,000).
"DECD" shall mean the State of Connecticut Department of Economic and
Community Development.
"Defaulting Event" shall mean the occurrence of an Event of Default or the
occurrence of any condition or event which but for the giving of notice or
passage of time or both would constitute an Event of Default.
"Distributions" shall mean, for any period of measurement with respect to
the Borrower, the following: (i) the declaration or payment of any dividend or
distribution on or in respect of the shares of any class of capital stock of the
Borrower, including dividends payable solely in shares of such corporation's
capital stock; and (ii) any other dividend or distribution for any purpose the
Borrower (however characterized), including without limitation, inter-company
loans and guarantees, to or for the benefit of any or all of its shareholders,
whether paid on or in respect of shares of any class of the capital stock of
such corporation or otherwise.
"Documents" shall mean all documents, as that term is defined in Article 9
of the UCC.
"Dollar" and the sign "$" shall mean lawful money of the United States.
"Eligible Account" shall mean an Account of the Borrower which is not an
Ineligible Account.
"Environmental Laws" shall mean any and all applicable foreign, federal,
state and local statutes, laws, regulations, rules, ordinances, orders,
guidances, policies or common law (whether now existing or hereafter enacted or
promulgated) of any and all federal, state or local governments and governmental
and quasi-governmental agencies, bureaus, subdivisions, commissions or
departments which may now or hereafter have jurisdiction over the Borrower and
all applicable judicial and administrative and regulatory decrees, judgments and
orders, including common law rulings and determinations, pertaining or relating
to injury to, or the protection of, the environment, health, safety or Hazardous
Materials, including without limitation, all requirements pertaining to
reporting, licensing, permitting, investigation, remediation and removal of
emissions, discharges, releases or threatened releases of Hazardous Materials,
chemical substances, pollutants or contaminants whether solid, liquid or gaseous
in nature, into the environment or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of such
Hazardous Materials, chemical substances, pollutants or contaminants, including
but not limited to the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, (CERCLA), 42 USC Section 9601 et seq.; the Resource
Conservation and Recovery Act, as amended, (RCRA), 42 USC Section 6901 et seq.;
the Clean Air Act, as amended, 42 USC Section et seq.; the Federal Water
Pollution Control Act, as amended (including but not limited to as amended by
the Clean Water Act), 33 USC Section 1251 et seq.; The Toxic Substances Control
Act, as amended (TSCA), 15 USC Section 2601 et seq.; the Emergency Planning and
Community Right-to-Know Act (also known as SARA Title III), as amended, (EPCRA),
42 USC Section 11001 et seq.; the Safe Drinking Water Act, as amended, 42 USC
Section 300(f) et seq.; the Federal Insecticide Fungicide and Rodenticide Act,
as amended (FIFRA), 7 USC Section 136 et seq.; the Occupational Safety and
Health Act, as amended, (OSHA), 29 USC Section 651 et seq.; the Endangered
Species Act, as amended, 16 USC Section 1531 et seq.; the National Environmental
Policy Act, as amended, (NEPA), 42 USC Section 4321 et seq.; the Rivers and
Harbors Act of 1899 33 USC Section 401 et seq.; and state and local laws, rules
and regulations similar to or addressing similar matters as the foregoing
federal laws; laws, rules and regulations governing underground or above-ground
storage tanks.
"Equipment" shall mean all equipment, as that term is defined in Article 9
of the UCC, in all of its forms, wherever located, now or hereafter existing,
and, in any event, shall include, without limitation, all machinery, tools,
dyes, equipment, furnishings, vehicles and computers and other electronic data
processing and other office equipment, any and all additions, substitutions and
replacements of any of the foregoing, wherever
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<PAGE> 4
located, together with all attachments, components, parts, equipment and
accessories installed thereon or affixed thereto, and all Contracts, contract
rights and Chattel Paper arising out of any lease of any of the foregoing.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974 and
all rules and regulations promulgated pursuant thereto, as the same may from
time to time be supplemented or amended.
"ESOT Loan" means that certain loan in the original principal amount of
$2,550,000 extended by Connecticut National Bank ("CNB") to Borrower on
December 19, 1985, and purchased from CNB by Wilshire Credit Corporation.
"Event of Default" and "Events of Default" shall have the meanings
assigned in Section 10.1 hereof.
"Facility" shall mean the revolving loan facility being extended to the
Borrower pursuant to this Agreement.
"Financing Agreements" shall mean this Agreement, the Note, the Assignment
of Life Insurance Policy as Collateral, and any and all other instruments,
agreements and documents executed in connection herewith or therewith or
related hereto or thereto, together with any amendments, supplements or
modifications hereto or thereto.
"GAAP" shall mean generally accepted accounting principles which are (i)
consistent with the principles promulgated or adopted by the Financial
Accounting Standards Board and its predecessors, consistently applied from year
to year, (ii) generally accepted in the United States of America, and (iii)
such that certified public accountants would, insofar as the use of accounting
principles is pertinent, be in a position to deliver an unqualified opinion as
to financial statements in which such principles have been properly applied.
"General Intangibles" shall mean all general intangibles, as that term is
defined in Article 9 of the UCC, and, in any event, shall include all right,
title and interest which the Borrower may now or hereafter have in or under any
Contract, all customer lists, trademarks, patents, rights in intellectual
property, interests in partnerships, joint ventures and other business
associations, licenses, permits, copyrights, trade secrets, proprietary or
confidential information, inventions (whether or not patented or patentable),
technical information, procedures, designs, knowledge, know-how, software, data
bases, data, skill, expertise, recipes, experience, processes, models,
drawings, blueprints, catalogs, materials and records, goodwill (including,
without limitation, the goodwill associated with any trademark, trademark
registration or trademark licensed under any trademark license, claims in or
under insurance policies, including unearned premiums, uncertificated
securities, deposit accounts, rights to receive tax refunds, eminent domain
awards, condemnation proceeds and other payments and rights of indemnification.
"Hazardous Materials" shall mean any chemical, compound, material, mixture
or substance: (i) the presence of which is discovered by a Borrower and/or
requires or may hereafter require notification, investigation, monitoring or
remediation under any Environmental Law; (ii) which is or becomes defined as a
"hazardous waste", "hazardous material" or "hazardous substance" or "toxic
substance" or "pollutant" or "contaminant" under any present or future
applicable federal, state or local law or under the rules and regulations
adopted or promulgated pursuant thereto, including without limitation, the
Environmental Laws; (iii) which is toxic, explosive, corrosive, reactive,
ignitable, infectious, radioactive, carcinogenic, mutagenic or otherwise
hazardous and is or becomes regulated by any governmental authority, agency,
department, commission, board, agency or instrumentality of any foreign
country, the United States, any state of the United States, or any political
subdivision thereof to the extent any of the foregoing has or had jurisdiction
over the Borrower; (iv) without limitation, which contains gasoline, diesel
fuel or other petroleum products, asbestos or polychlorinated biphenyls; or (v)
any other chemical, material or substance, exposure to, or disposal of, which
is now or hereafter prohibited, limited or regulated by any federal, state or
local governmental body, instrumentality or agency.
"Indebtedness" shall mean all obligations that in accordance with GAAP
should be classified as liabilities upon the Borrower's balance sheet or to
which reference should be made by footnotes thereto.
-4-
<PAGE> 5
"Indemnifiable Liability" shall have the meaning assigned in Section
15.1(a) hereof.
"Indemnitees" shall have the meaning assigned in Section 15.1(a) hereof.
"Ineligible Account" shall mean:
(iii) an Account which does not arise out of a bona fide sale of
goods and/or the rendering of services of the kind sold or rendered by the
Borrower in the ordinary course of its business; or
(iv) an Account which remains unpaid for ninety (90) calendar
days past the invoice date set forth on the original invoice evidencing such
Account; or
(v) an Account which does not conform to the all of the
warranties set forth in Section 6.1(v) hereof; or
(vi) an Account arising from a sale of goods and/or the
rendering of services to an affiliate, parent, division or subsidiary of the
Borrower or to any person or entity controlled by or under common control with
any such affiliate, division, subsidiary or parent; or
(vii) an Account with respect to which the Account Debtor has
commenced a voluntary case in bankruptcy, or made an assignment for the benefit
of creditors, or if a decree or order for relief has been entered by a court
having jurisdiction over the Account Debtor in an involuntary case in
bankruptcy, or if any petition or other application for relief in bankruptcy
has been filed against the Account Debtor, or if the Account Debtor has failed,
ceased business operations, become insolvent or consented to or suffered a
receiver, trustee, liquidator or custodian to be appointed for it or all or
substantially all of its properties or assets; or
(viii) an Account with respect to which the goods giving rise
thereto have not been shipped and delivered to and accepted by the Account
Debtor or the services giving rise thereto have not been performed by the
Borrower and accepted by the Account Debtor, or if the Account does not
otherwise represent a final sale; or
(ix) an Account arising from a sale to an Account Debtor which
is a creditor or an inventory or trade supplier of the Borrower; or
(x) an Account of an Account Debtor located outside of the
United States of America unless such Account is secured by a letter of credit
or foreign credit insurance acceptable to the Bank, in its sole discretion; or
(xi) an Account upon which the Borrower's right to receive
payment is not absolute and contingent upon the fulfillment of any condition
whatsoever (e.g. bill-and-hold, guaranteed sale, sale-and-return, sale on
approval, consignment or other repurchase or return basis); or
(xii) an Account with respect to which the Account Debtor is the
United States of America or any department, agency or office thereof, unless
the Borrower assigns its rights to payment of such Account to the Bank in
accordance with the Federal Assignment of Claims Act of 1940, as amended; or
(xiii) an Account with respect to which the Account Debtor has
paid or advanced to the Borrower any deposit or other advance (e.g. progress
payments) in respect of the payment thereof; or
(xiv) an Account with respect to which the Account Debtor has
earned or accrued, or is due, any rebate, discount, credit or other allowance
by the Borrower; or
-5-
<PAGE> 6
(xv) an Account which arises from the exchange or barter of any
goods or services; or
(xvi) an Account of an Account Debtor which has disputed liability
thereon or has made any material claim with respect to any other Account due
from such Account Debtor, or which is subject to any right of set-off; or
(xvii) an Account of an Account Debtor from which fifty percent
(50%) or more of the aggregate Accounts due from such Account Debtor are
Ineligible Accounts; or
(xviii) an Account which is, in the Banks's sole but reasonable
judgment, the Account of an Account Debtor which is an undue credit risk, or
which the Bank, in its sole but reasonable discretion, deems uncollectible or
ineligible for an Advance for any reason whatsoever.
In the event of any dispute as to whether or not any Account is an
Eligible Account, the determination of the Bank shall at all times control.
"Instruments" shall mean all instruments, as that term is defined in
Article 9 of the UCC, and, in any event, shall include any investment property,
negotiable instrument or certificated security, as defined in Article 8 of the
UCC, or any other writing which evidences a right to the payment of money and
is not itself an instrument that constitutes, or is a part of a group or
writings that constitute, Chattel Paper, and is of a type which, in the
ordinary course of business, is transferred by delivery with any necessary
endorsement or assignment, whether now or hereafter held by the Borrower;
"Intangible Assets" shall mean the Borrower's assets that in accordance
with GAAP are properly classifiable as intangible assets, including, but not
limited to, good will, franchises, licenses, patents, trademarks, tradenames
and copyrights.
"Interest" shall mean, for the applicable period, all interest paid or
payable, including, but not limited to, interest paid or payable on
Indebtedness and on Capital Leases, determined in accordance with GAAP.
"Inventory" shall mean all inventory, as that term is defined in Article 9
of the UCC, in all of its forms, wherever located, now or hereafter existing,
and, in any event, shall include all inventory, merchandise, goods, spare
parts, raw materials, supplies, work in process, finished goods, goods in
transit and other personal property, including without limitation, all
supplies, goods, incidentals, office supplies, packaging materials, in which
the Borrower now or any time hereafter may have an interest, whether or not
such inventory is listed on any reports furnished to the Bank from time to
time, and whether or not the same is in transit or in the constructive, actual
or exclusive occupancy or possession of the Borrower or is held by the
Borrower or by others for the Borrower's account, including, without
limitation, all goods covered by purchase orders and contracts with suppliers
and all goods billed and held by suppliers and all goods which may be located
on premises of any carriers, forwarding agents, truckers, warehousemen,
vendors, selling agents or other persons, and all General Intangibles relating
to or arising out of Inventory.
"Leverage Ratio" shall mean that quotient equal to (i) Total Liabilities
divided by (ii) Tangible Net Worth.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment,
security interest, lien or encumbrance, priority or other security agreement or
arrangement of any kind or nature whatsoever (including, without limitation,
any conditional sale or other title retention agreement, any lease (other than
an operating lease) having substantially the same economic effect as a
conditional sale or other title retention agreement, and the filing of, or
agreement to give, any financing statement or other document under the UCC or
comparable law of any jurisdiction).
"Loan Account" shall have the meaning assigned in Section 2.4 hereof.
-6-
<PAGE> 7
"Material Adverse Effect" shall mean a material adverse effect on (i)
the business, condition (financial or otherwise), operations, performance or
properties of the Borrower, (ii) the rights and remedies of the Bank under any
Financing Agreement, or (iii) the ability of the Borrower to perform its
obligations under any Financing Agreement.
"Note" shall mean the promissory note of the Borrower payable to the
order of the Bank, in the form of Exhibit A attached hereto, evidencing the
Obligations arising from the Advances.
"Notice of Borrowing" shall have the meaning assigned in Section 2.2
hereof.
"Obligations" shall mean and include all loans, advances, interest,
indebtedness, liabilities, obligations, guaranties, indemnities, covenants and
duties at any time owing by the Borrower to the Bank of every kind and
description, whether or not evidenced by any note or other instrument, whether
or not for the payment of money, whether direct or indirect, absolute or
contingent, due or to become due, now existing or hereafter arising, including,
but not limited to, the Advances and all other indebtedness, liabilities and
obligations arising under this Agreement and the other Financing Agreements,
and all reasonable costs, expenses, fees, charges and attorneys', paralegals'
and professional fees incurred in connection with any of the foregoing, or in
any way connected with, involving or relating to the preservation, enforcement,
protection or defense of, or realization under this Agreement, the Note, any of
the other Financing Agreements, any related agreement, document or instrument,
the Collateral, and the rights and remedies hereunder or thereunder, including
without limitation, all reasonable costs, expenses and fees incurred in
conducting environmental studies or tests, and all reasonable costs, expenses
and fees incurred in connection with any "workout" or default resolution
negotiations involving legal counsel or other professionals and further in
connection with any re-negotiation or restructuring of the indebtedness
evidenced by this Agreement, the Note and/or any of the other Financing
Agreements.
"Permitted Liens" shall mean (ii) Liens for taxes which are not yet
due and payable or which are being contested in good faith provided that such
contest stays any enforcement proceeding, (ii) materialmen's, mechanics',
repairmen's and other like Liens arising in the ordinary course of business
securing obligations which are not more than thirty (30) days overdue or which
are being contested in good faith, and (iii) Liens imposed by law in connection
with workers' compensation, unemployment insurance, social security or similar
legislation which are not more than thirty (30) days overdue or which are being
contested in good faith.
"Plan" shall mean any employee benefit plan or other plan maintained
for employees covered by Title I of ERISA.
"Premises" shall have the meaning assigned in Section 6.1(y)(iii)
hereof.
"Prime Rate" shall mean the interest rate announced by the Bank, from
time to time, as its prime rate. The Prime Rate may not necessarily be the
Bank's lowest or most favorable rate.
"Proceeds" shall mean all proceeds, as that term is defined in
Article 9 of the UCC, and, in any event, shall include (a) any and all
Accounts, Chattel Paper, Instruments, cash and other proceeds payable to the
Borrower from time-to-time in respect of any of the foregoing collateral
security, (b)any and all proceeds of any insurance (whether or not the Bank is
the loss payee thereof), indemnity, warranty or guaranty payable to the
Borrower from time-to-time with respect to any of the collateral security, (c)
any and all payments (in any form whatsoever) made or due and payable to the
Borrower from time-to-time in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the collateral
security by any governmental body, authority, bureau or agency (or any person
acting under color of governmental authority), and (d) any and all other
amounts from time-to-time paid or payable under or in connection with any of
the collateral security.
"Property" shall mean the premises that are commonly known as 99
Thompson Road, Avon, Connecticut.
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<PAGE> 8
"Solvent" means as to the Borrower, that the Borrower (i) has capital
sufficient to carry on its business and transactions and all business and
transactions in which it is about to engage; (ii) is able to pay its debts as
they mature; and (iii) owns property whose fair salable value is greater than
the amount required to pay its debts.
"Tangible Net Worth" shall mean, as of any date of determination, the
sum of (i) Total Assets, minus (ii) the sum of (A) Total Liabilities, plus (B)
Intangible Assets.
"Termination Date" shall mean June 1, 1998, and any subsequent date to
which the Termination Date may, in the Bank's sole discretion, be extended
pursuant to Section 13.1 hereof.
"Total Current Assets" shall mean total current assets determined in
accordance with GAAP (using the FIFO inventory valuation method).
"Total Current Liabilities" shall mean total current Indebtedness
determined in accordance with GAAP (using the FIFO inventory valuation method).
"Total Liabilities" shall mean total Indebtedness determined in
accordance with GAAP.
"Trade Payables" shall mean, at the time of determination, the total
accounts payable of the Borrower determined in accordance with GAAP.
"Trade Payables Ratio" shall mean, for any period, that quotient equal
to (i) Cost of Sales for such period divided by (ii) Trade Payables.
"Transfer Act" shall mean The Connecticut Transfer Act, Section
22a-134 et seq. of the Connecticut General Statutes, as amended.
"UCC" shall mean the Uniform Commercial Code as in effect from
time-to-time in the State of Connecticut (with respect to Collateral located in
the State of Connecticut) and any other State of the United States (with respect
to Collateral located in such State), as the case be.
"Unused Commitment Amount" shall mean at any time (i) the Commitment
Amount minus (ii) the aggregate principal amount of all Advances outstanding at
such time.
Section 1.2 Computation of Time Periods. In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" shall mean "from and including" and the words "to" and "until"
each mean "to but excluding".
Section 1.3 Accounting Terms. Unless otherwise defined, all accounting
terms defined above shall be construed, and all computations or classifications
of assets and liabilities and of income and expenses shall be made or
determined in accordance with GAAP.
ARTICLE II
TERMS OF THE ADVANCES
Section 2.1 Advances. In the Bank's sole but reasonable discretion and
subject to the terms and conditions contained in this Agreement, the Bank
agrees to make advances (each a "Advance") to the Borrower from time to time on
any Business Day during the period from the date hereof until the Termination
Date in an amount for each such Advance not to exceed the Unused Commitment
Amount on such Business Day; provided that each Advance shall be in a minimum
amount of $50,000. Within the limits of the Unused Commitment Amount, so long
as the Borrower is in compliance with all of the terms and conditions of this
Agreement (including
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without limitation, Section 7.2(a)(iv) pertaining to the absence of a Borrowing
Base Deficiency) and no Defaulting Event has occurred, the Borrower may request
Advances under this Section 2.1, repay all or a portion of outstanding Advances
pursuant to Section 3.2 hereof, and request to re-borrow Advances under this
Section 2.1.
Section 2.2 Procedure for Advances.
(a) Notices of Borrowing. Requests for Advances may be made
only once per Business Day, and shall be made on notice, given not later than
11:00 a.m. (Hartford, Connecticut time) on the date of the proposed borrowing,
by the Borrower to the Bank. Each such notice (which notice shall be
irrevocable and binding on the Borrower) of a proposed borrowing (a "Notice of
Borrowing") shall be by telephone, confirmed immediately in writing, or by
telex or telecopier, specifying the date of the proposed borrowing (which shall
be a Business Day) and the amount to be borrowed. To be eligible to obtain any
Advance, the Borrower must submit to the Bank, together with each Notice of
Borrowing, a Borrowing Base Certificate containing current calculations and
reconciliations as of the date thereof. In the event that written confirmation
of a telephonic Notice of Borrowing differs in any respect from the action
taken by the Bank, the records of the Bank shall control absent manifest error.
(b) Disbursement of Advances. Insofar as the Borrower may
request and the Bank shall make Advances hereunder, the Bank may make such
funds available to the Borrower by crediting the Borrower's Account.
Section 2.3 Repayment of Advances, Obligations Absolute.
(a) Advances. NOTWITHSTANDING THE BANK'S RIGHTS UPON THE
OCCURRENCE OF A DEFAULTING EVENT AND WHETHER OR NOT ANY SUCH DEFAULTING EVENT
HAS OCCURRED, THE BORROWER SHALL REPAY TO THE BANK THE OUTSTANDING PRINCIPAL
AMOUNT OF ANY AND ALL ADVANCES ON THE TERMINATION DATE.
(b) Obligations Absolute.
(i) The Obligations of the Borrower under this Agreement
and the other Financing Agreements shall be unconditional and irrevocable, and
shall be paid strictly in accordance with the terms of this Agreement and such
other Financing Agreements under all circumstances, including without
limitation, the following circumstances:
(A) any lack of validity or enforcement of this Agreement,
any other Financing Agreement or any other agreement or instrument relating
thereto;
(B) any change in the time, manner or place of payment of,
or in any other term of, all or any of the Obligations;
(C) any amendment or waiver of, or consent to departure
from, any of the Financing Agreements or all or any of the Obligations;
(D) the existence of any claim, set-off, defense or other
right that the Borrower may have, whether in connection with the transactions
contemplated by this Agreement or any unrelated transaction;
(E) any exchange, release or non-perfection of any
Collateral or other collateral, or any release of any party primarily or
secondarily liable on any of the Obligations, or any amendment or waiver of or
consent to departure from any guarantee of all or any of the Obligations; or
(F) any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing, including without limitation,
any other circumstance that might otherwise constitute a defense available to,
or a discharge of, the Borrower or of any other party primarily or secondarily
liable on any of the Obligations.
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Section 2.4 Loan Account, Monthly Statements. Insofar as the Bank shall
make Advances hereunder, the Bank shall enter the amounts of such Advances as
debits on an internal ledger account (the "Loan Account"). The Bank may also
record to the Loan Account, in accordance with customary banking procedures,
all fees, accrued and unpaid interest, late fees, usual and customary bank
charges for the maintenance and administration of checking and other bank
accounts maintained by the Borrower and other fees and charges which are
properly chargeable to the Borrower under this Agreement; all payments, subject
to collection, made by the Borrower on account of indebtedness evidenced by the
Loan Account; and all proceeds of Collateral which are finally paid to the Bank
in its own office in cash or collected items. On a monthly basis, the Bank
shall render a statement for the Loan Account, which statement, when rendered,
shall be considered correct and accepted by the Borrower and conclusively
binding upon the Borrower unless the Borrower notifies Bank to the contrary
within ten (10) days of the receipt of said statement by the Borrower.
Section 2.5 Direct Debits. The Bank shall have the right (but not the
obligation) to directly debit the Borrower's Account or any other account of
the Borrower maintained at the Bank for all interest charges on the Advances on
the first day of each and every month commencing on April 1, 1996, and any
fees, charges or other sums (including without limitation, principal) due to
the Bank as and when the same shall be due and payable.
Section 2.6 Use of Facility Proceeds. The Borrower represents that the
proceeds of the Advances shall be used for general working capital purposes and
to repay existing indebtedness owing by Borrower to First Union Bank of
Connecticut related to the Borrower's current business operations.
ARTICLE III
INTEREST, LATE PAYMENT,
PREPAYMENTS AND COMMITMENT FEE
Section 3.1 Interest and Late Payments.
(a) Pre-default Rates. So long as no Defaulting Event has occurred,
each Advance shall bear interest (from the date made through and including the
date of payment in full) on the outstanding principal amount thereof at a
floating rate per annum equal to the Prime Rate plus two percent (2.0%).
(b) Default Rates. Notwithstanding the foregoing, interest on all
Advances at all times after the occurrence of an Event of Default under
Sections 10.1(a) or (b) or any Event of Default followed by an acceleration by
the Bank of the Obligations, and interest on all payments of interest that are
not paid when due, shall accrue at the lesser of (A) a floating rate per annum
equal to the Prime Rate plus seven percent (7.0%), and (B) the maximum rate
permitted by law.
(c) Payment of Interest. So long as any Obligation remains
outstanding, interest on the Advances shall be due and payable, without notice
or demand, monthly in arrears beginning on May 1, 1997 and continuing on the
first day of each and every month thereafter.
(d) Calculation of Interest. Interest on the Advances shall be
calculated on the basis of a 360 day year and the actual number of days
elapsed. Any change in the interest rate because of a change in the Prime Rate
shall become effective immediately, without notice or demand, on the date any
change in the Prime Rate occurs.
(e) Lawful Interest. It being the intent of the parties that the
rate of interest and all other charges to the Borrower be lawful, if for any
reason the payment of a portion of interest, fees or charges as required by
this Agreement would exceed the limit established by applicable law which a
commercial lender such as the Bank may charge to a commercial borrower such as
the Borrower, then the obligation to pay interest or charges shall automatically
be reduced to such limit and, if any amounts in excess of such limits shall have
been paid, then
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such amounts shall be applied to the principal amount of the Obligations or
refunded so that under no circumstances shall interest or charges required
hereunder exceed the maximum rate allowed by law, as aforesaid.
(f) Late Payment. If any amount due hereunder or under the Note is
not paid within ten (10) days after the date it is due and payable, without in
any way affecting the Bank's right to declare an Event of Default to have
occurred, a late charge equal to five percent (5%) of such late payment shall be
assessed against the Borrower for each month that said amount is late and shall
be immediately due and payable without notice or demand of any kind. The minimum
late charge shall be $15.00.
Section 3.2 Prepayments.
(a) Optional Prepayments. The Borrower may, at its option, prepay any
Advance at any time and from time to time, in whole or in part, without penalty
or premium.
(b) Mandatory Prepayments. The Borrower shall prepay an aggregate
principal amount of outstanding Advances equal to the amount by which (i) the
aggregate principal amount of the Advances then outstanding exceeds (ii) either
(A) the Commitment Amount, in which case such prepayment shall be made on the
date upon which such determination is made, or (B) the Borrowing Base (as
reflected on the Borrowing Base Certificate most recently required to be
delivered to the Bank), in which case the prepayment shall be made on the date
upon which such determination is made, unless a more recent Borrowing Base
Certificate delivered on such date as certified by the president or chief
financial officer indicates as of such date that no such prepayment is required.
Section 3.3 Commitment Fee. In connection with the Bank's extension of the
Facility, the Borrower shall pay to the Bank simultaneously herewith a
non-refundable commitment fee of $3,750.
ARTICLE IV
[INTENTIONALLY OMITTED]
ARTICLE V
FUNDING AND YIELD PROTECTION
Section 5.1 Increased Costs. In the event that any applicable law, treaty
or regulation or directive from any government, governmental agency or
regulatory authority enacted after the date hereof, or any change therein or in
the interpretation or application thereof, or compliance by the Bank with any
request or directive (whether or not having the force of law) enacted after the
date hereof from any central bank or government, governmental agency or
regulatory authority, shall:
(a) subject the Bank to any tax of any kind whatsoever (except taxes
on the overall net income of the Bank) with respect to this Agreement, the Note
or any of the Advances made by it, or change the basis of taxation of payments
to the Bank of principal, interest or any other amount payable hereunder or
thereunder (except for changes in the rate of tax on the overall net income of
the Bank);
(b) impose, modify or hold applicable any reserve, special deposit,
compulsory loan or similar requirements against assets held by, or deposits or
other liabilities in or for the account of, advances or loans or other
extensions of credit by, or any other acquisition of funds by, any office of
the Bank, including (without limitation) pursuant to Regulations of the Board
of Governors of the Federal Reserve System; or
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<PAGE> 12
(c) in the opinion of the Bank, cause the Note, any Advance or this
Agreement to be included in any calculations used in the computation of
regulatory capital standards; or
(d) impose on the Bank any other condition;
and the result of any of the foregoing is to increase the cost to the Bank of
making, continuing and/or maintaining the Advances (or any part thereof) by an
amount that the Bank deems to be material, or to reduce the amount of any
payment (whether of principal, interest or otherwise) in respect of any of the
Advances by an amount that the Bank deems to be material, then, in any case,
the Borrower shall promptly pay the Bank, upon its demand, such additional
amounts necessary to compensate the Bank for such additional costs or such
reduction in payment. The Bank shall certify the amount of such additional
costs to the Borrower, and such certification, absent manifest error, shall be
deemed conclusive.
Section 5.2 Capital Adequacy Protection. If, after the date hereof, the
Bank shall have determined that the adoption after the date hereof of any
applicable law, governmental rule, regulation or order regarding capital
adequacy of banks or bank holding companies, or any change therein, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Bank with any request or directive
regarding capital adequacy (whether or not having the force of law and whether
or not failure to comply therewith would be unlawful, so long as the Bank
believes in good faith that such has the force of law or that the failure to so
comply would be unlawful) of any such authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on any of
the Bank's capital as a consequence of the Bank's obligations hereunder to a
level below that which the Bank could have achieved but for such adoption,
change or compliance (taking into consideration the Bank's policies with
respect to capital adequacy immediately before such adoption, change or
compliance and assuming that the Bank's capital was fully utilized prior to
such adoption, change or compliance) by an amount deemed by the Bank in its
judgment to be material, then, promptly upon demand, the Borrower shall
immediately pay to the Bank, from time to time as specified by the Bank, such
additional amounts as shall be sufficient to compensate the Bank for such
reduced return, together with interest on each such amount from the date of
such specification by the Bank until payment in full thereof at the highest
rate of interest (other than the default rate of interest) due on the Advances.
A certificate of the Bank setting forth the amount to be paid to the Bank
shall, in the absence of manifest error, be deemed conclusive. In determining
such amount, the Bank shall use any reasonable averaging and attribution
methods. The Borrower may, however, avoid paying such amounts for future rate
of return reductions if, within the maximum borrowings permitted herein (but
subject to availability), the Borrower borrows such amounts as will cause the
Bank to avoid any such future rate of return reductions which would otherwise
be caused by such changed capital adequacy requirements or the Borrower agrees
to a reduction in the Facility to achieve the same result.
Section 5.3 Survival. The obligations and covenants of the Borrower under
this Article V shall survive the termination of this Agreement and payment of
the Advances and other Obligations in full.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
Section 6.1 Representations and Warranties. In order to induce the Bank
to enter into this Agreement and to make Advances, the Borrower makes the
following representations and warranties to the Bank, which shall be deemed
made as of the date hereof and of each Advance and shall survive the execution
and delivery hereof and each performance hereunder. Any knowledge acquired by
the Bank shall not diminish its rights to rely upon such representations and
warranties.
(a) Good Standing and Qualification. The Borrower is duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and has all requisite corporate power and authority to own
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and operate its properties and to carry on its business as presently conducted
and is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction wherein the character of the properties owned
or leased by it therein or in which the transaction of its business therein
makes such qualification necessary and where the failure to so qualify would
have a Material Adverse Effect.
(b) CORPORATE AUTHORITY. The Borrower has full power and authority to
enter into this Agreement and the other Financing Agreements, to make the
borrowings contemplated herein, to execute and deliver the Note and the other
Financing Agreements, and to incur the obligations provided for herein and
therein, all of which have been duly authorized by all necessary and proper
corporate action. No other consent or approval or the taking of any other
action in respect of shareholders or of any public authority is required as a
condition to the validity or enforceability of this Agreement, the Note, the
other Financing Agreements, or any other instrument, document or agreement
delivered in connection herewith or therewith.
(c) BINDING AGREEMENTS. This Agreement constitutes, and the Note and the
other Financing Agreements executed and/or delivered in connection herewith or
therewith, when issued and delivered pursuant hereto for value received shall
constitute, the valid and legally binding obligations of the Borrower,
enforceable in accordance with their respective terms, except as enforcement
may be limited by principles of equity, bankruptcy, insolvency, or other laws
affecting the enforcement of creditors' rights generally.
(d) LITIGATION. There are no actions, suits or proceedings pending against
the Borrower before any court or administrative agency, nor to the best of the
Borrower's knowledge, are any actions, suits or proceedings threatened, which,
either in any case or in the aggregate, would have a Material Adverse Effect,
nor are there any such actions, suits or proceedings which question the
validity of this Agreement, the Note, any of the other Financing Agreements, or
any action to be taken in connection with the transactions contemplated hereby
or thereby.
(e) NO CONFLICTING LAW OR AGREEMENTS. The execution, delivery and
performance by the Borrower of this Agreement, the Note and the other Financing
Agreements: (i) do not violate any provision of the Certificate of
Incorporation or By-laws of the Borrower, (ii) do not violate any order, decree
or judgment, or any provision of any statute, rule or regulation, (iii) do not
violate or conflict with, result in a breach of or constitute (with notice or
lapse of time, or both) a default under any shareholder agreement, stock
preference agreement, mortgage, indenture or other contract or undertaking to
which the Borrower is a party, or by which any of its properties is bound, and
(iv) do not result in the creation or imposition of any Lien, charge or
encumbrance of any nature whatsoever upon any property or assets of the
Borrower, except for the Liens granted hereunder to the Bank.
(f) TAXES. With respect to all taxable periods of the Borrower, the
Borrower has filed all tax returns which are required to be filed and all
federal, state, municipal, franchise and other taxes shown on such filed
returns have been paid or are being diligently contested, in good faith, by
appropriate proceedings and have been reserved against as required by GAAP.
(g) FINANCIAL INFORMATION. All written data, reports and information which
the Borrower has heretofore delivered or caused to be so delivered to the Bank
in connection with this Agreement are complete and correct in all material
respects, contain no material omission or misstatement and fairly present the
financial condition of the Borrower as of the dates and for the periods
referred to and have been prepared in accordance with GAAP consistently applied
by the Borrower throughout the periods involved. All financial and other
information including, but not limited to, information relating to the
Accounts, submitted by the Borrower to the Bank, whether previously or in the
future, is and will be true and correct in all material respects, and is and
will be complete insofar as may be necessary to give the Bank a true and
accurate knowledge of the subject matter.
(h) ADVERSE DEVELOPMENTS. Since the date of the most recent financial
statements of the Borrower delivered to the Bank, there has been no Material
Adverse Effect.
(i) EXISTENCE OF INDEBTEDNESS. Set forth on SCHEDULE 6.1(i) is a complete
and accurate list of all existing indebtedness of the Borrower to any person or
entity, including without limitation, all indebtedness
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owning to any officer, director, shareholder and/or employee of the Borrower,
showing as of the date hereof the principal amount outstanding thereunder and
all Liens and security interests of any nature given or agreed to be given as
security therefor.
(j) Existence of Assets and Title Thereto. The Borrower has good and
marketable title to its properties and assets, including the properties and
assets reflected in the financial statements referred to above. Such properties
and assets are not subject to any mortgage, pledge, Lien, lease, encumbrance or
charge except those permitted under the terms of this Agreement and as set
forth on Schedule 6.1(j).
(k) Regulations G, T, U and X. The proceeds of the borrowings hereunder
are not being used and will not be used, directly or indirectly, for the
purposes of purchasing or carrying any margin stock in contravention, or which
would cause any bank to be in violation, of Regulations G, T, U or X
promulgated by the Board of Governors of the Federal Reserve System.
(l) Compliance. The Borrower is not in default with respect to any order,
writ, injunction or decree of any court or of any federal, state, municipal or
other governmental department, commission, board, bureau, agency, authority or
official and, except as set forth in Schedule 6.1(l), is not in violation of any
law, statute, rule or regulation to which it or its properties is subject, where
such default or violation would have a Material Adverse Effect. The Borrower
further represents that it has not received notice of any such default from any
party; and is not in default in the payment or performance of any of its
obligations to any third parties or in the performance of any mortgage,
indenture, lease, contract or other agreement to which it is a party or by which
any of its assets or properties is bound, where, in either case, such default or
violation would have a Material Adverse Effect.
(m) Leases. The Borrower enjoys quiet and undisturbed possession under all
leases under which its operating, and all of such leases are valid and
subsisting and not in default.
(n) Pension Plans. Each of the Borrower's Plans complies currently, and
has complied in the pass, both as to form and operation, with its terms and
with provisions of the Internal Revenue Code of 1986, as amended and ERISA, and
all applicable regulations thereunder and all rules issued by the Internal
Revenue Service, U.S. Department of Labor and the Pension Benefit Guaranty
Corporation and as such, is and remains a "qualified" plan under the Code. A
list of all of the Borrower's Plans is attached hereto and Schedule 6.1(n).
(o) Deferred Compensation Arrangements. The Borrower has not entered into
any employment contracts or deferred compensation plans, incentive compensation
plans, executive compensation plans, arrangements or commitments not required
to be disclosed pursuant to Section 6.1(n) hereof (other than normal policies
regarding holidays, vacations and salary continuation during short periods of
illness).
(p) Office. The chief executive office and principal place of business of
the Borrower, and the office where its books and records concerning Collateral
are kept, is as set forth in the first paragraph of this Agreement.
(q) Places of Business. The Borrower has no other places of business and
locates no Collateral, specifically including books and records, at any
location other than as set forth in the first paragraph of this Agreement
except for certain machinery and equipment used to produce Borrower's photo
control line of products located at a vendor's facility in Juarez, Mexico.
(r) Contingent Liabilities. The Borrower is not a party to any suretyship,
guarantyship, or other similar type agreement; nor has it offered its
endorsement to any individual, concern, corporation or other entity or acted or
failed to act in any manner which would in any way create a contingent liability
that does not appear in the financial statements referred to hereinbefore.
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(s) Contracts. No contract, governmental or otherwise, to which the
Borrower is a party, is subject to renegotiation of any material terms, nor is
the Borrower in default of any material contract where such default would have
a Material Adverse Effect.
(t) Licenses. The Borrower has all licenses, permits and other permissions
required by any government, agency or subdivision thereof, or from any
licensing entity necessary for the conduct of its business, the failure of
which to maintain would have a Material Adverse Effect, all of which the
Borrower represents to be in good standing and in full force and effect.
(u) Collateral. The Borrower is and shall continue to be the legal and
beneficial owner of the Collateral free and clear of all Liens, encumbrances,
security interests and claims, except for the Liens granted to the Bank and the
Liens set forth on Schedule 6.1(j); the Borrower is fully authorized to sell,
transfer, pledge and/or grant a security interest in each and every item of
Collateral to the Bank; all documents and agreements related to the Collateral
shall be true and correct and in all respects what they purport to be; all
signatures and endorsements that appear thereon shall be genuine and all
signatories and endorsers shall have full capacity to contract; none of the
transactions underlying or giving rise to the Collateral shall violate any
applicable state or federal laws or regulations; all documents relating to the
Collateral shall be legally sufficient under such laws or regulations and shall
be legally enforceable in accordance with their terms; this Agreement creates a
valid security interest in the Collateral, securing the payment of the
Obligations, and the Borrower agrees to defend the Collateral against the
claims of all persons other than the Bank.
(v) Eligible Accounts. Each Eligible Account, at the time it comes into
existence, will be a true and correct statement of: (i) the bona fide
indebtedness of the Account Debtor named thereon; and (ii) the amount of the
Account for such Inventory sold and delivered to, or for services performed for
and accepted by, the Account Debtor, net of any charges, adjustments, discounts
or other reductions whatsoever.
(w) Parent, Affiliate or Subsidiary Corporations. The Borrower has no
parent, affiliate or subsidiary corporations.
(x) Tradenames. Except as set forth in Schedule 6.1(x), the Borrower has
no tradenames.
(y) Environmental Matters.
(i) The Borrower has obtained or applied for all material permits,
licenses and other authorizations (including without limitation, authorizations
by appropriate governmental authorities to operate without permits) which are
required under all Environmental Laws. The Borrower is in material compliance
with the terms and conditions of all such permits, licenses and authorizations,
and is also in material compliance with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules and
timetables contained in any applicable Environmental Law or in any regulation,
code, plan, order, decree, judgment, injunction, notice or demand letter
issued, entered, promulgated or approved thereunder.
(ii) No notice, notification, demand, request for information,
citation, summons or order has been issued, no complaint has been filed, no
penalty has been assessed and no investigation or review is pending or
threatened by any governmental or other entity with respect to any alleged
failure by the Borrower to have any permit, license or authorization required
in connection with the conduct of its business or with respect to any
Environmental Laws, including without limitation, Environmental Laws relating
to the generation, treatment, storage, recycling, transportation, disposal or
release of any Hazardous Materials.
(iii) Except as described on Schedule 6.1(y), No oral or written
notification of a release of a Hazardous Material has been filed by or against
the Borrower and no property now or previously owned, leased or used by the
Borrower (including the Property, the "Premises") is listed or proposed for
listing on the Comprehensive Environmental Response, Compensation and Liability
Inventory of Sites or National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, or
on any similar state or federal list of sites requiring investigation or
clean-up.
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(iv) There are no known Liens or encumbrances arising under or
pursuant to any Environmental Laws on any of the Premises and no known
governmental actions have been taken or are in process which could subject any
of such Premises to such Liens or encumbrances or, as a result of which the
Borrower would be required to place any notice or restriction relating to the
presence of Hazardous Materials at any property owned by it in any deed to such
property.
(v) The Borrower has not (A) engaged in or permitted any operations or
activities upon or any use or occupancy of such property, or any portion
thereof, for the purpose of or in any way involving the release, discharge,
refining, dumping or disposal (whether legal or illegal, accidental or
intentional) of any Hazardous Materials on, under, or in or about such property,
or (B) transported or had transported any Hazardous Materials to such property
except to the extent such Hazardous Materials are raw products commonly used in
day-to-day manufacturing operations of such property and, in such case, in
material compliance with, all Environmental Laws; (C) engaged in or permitted
any operations or activities which would allow the facility to be considered a
treatment, storage or disposal facility as that term is defined in 40 CFR 264
and 265, (D) engaged in or permitted any operations or activities which would
cause any of the Premises (other than the Property) to become subject to the
Transfer Act; or (E) constructed, stored or otherwise located Hazardous
Materials on, under, in or about any such property except to the extent commonly
used in day-to-day operations of such property and, in such case, in material
compliance with all Environmental Laws. Further, to the best knowledge and
belief of the Borrower, no Hazardous Materials have migrated from other
properties upon, about or beneath any property owned, leased or used by the
Borrower.
(vi) The Property is not an "establishment" as such term is defined in
the Transfer Act.
(z) MATERIAL JUDGMENTS. The Borrower has no unsatisfied material judgments.
(aa) NO DEFAULTING EVENT. No Defaulting Event has occurred and is
continuing.
(bb) SOLVENCY. Borrower is and shall at all times continue to be Solvent.
(cc) FISCAL YEAR. Borrower's fiscal year end is, and at all times shall be,
December 31.
ARTICLE VII
CONDITIONS OF LENDING
Section 7.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. Subject to the terms
of Section 7.2 hereof, the obligation of the Bank to make the initial Advance
under this Agreement is subject to the delivery by Borrower of each of the
documents and items described on the Closing Document Index attached hereto as
EXHIBIT B and such other terms as the Bank may request.
Section 7.2 CONDITIONS PRECEDENT TO EACH ADVANCE. The obligation of the
Bank to make an Advance (including the initial Advance), on the occasion of
each request therefor shall be subject to the further conditions precedent that
on the date of such Advance (a) the following statements shall be true (and
each of the giving of the applicable Notice of Borrowing and the acceptance by
the Borrower of the proceeds of such Advance shall constitute a representation
and warranty by the Borrower that both on the date of such notice and on the
date of such borrowing or issuance such statements are true):
(i) ABSENCE OF TERMINATION OF DEFAULTING EVENT. Neither the Bank nor
the Borrower shall have terminated the Facility for any reason, nor shall a
Defaulting Event exist or have occurred, or would exist or occur as a result of
such borrowing or issuance or from the application of the proceeds thereof;
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<PAGE> 17
(ii) Absence of Material Adverse Effect. No Material Adverse Effect
has occurred with respect to the Borrower;
(iii) Truth of Representations and Warranties. All of the
representations and warranties set forth in Article VI hereof are true and
correct in all material respects on and as of such date, before and after
giving effect to such borrowing or issuance and to the application of proceeds
therefrom, as though made on and as of such date other than any such
representations or warranties that, by their terms, refer to a specific date
other than the date of such borrowing or issuance, in which case as of such
specific date; and
(iv) Borrowing Base Deficiency. For each Advance, no Borrowing Base
Deficiency (as determined by reference to the Borrowing Base Certificate most
recently delivered to the Bank) exist before or after giving effect to such
Advance or issuance, respectively;
and (b) the Bank shall have received such further documents, instruments and
agreements as the Bank may reasonably request, including without limitation, a
Borrowing Base Certificate.
ARTICLE VIII
COVENANTS
A. AFFIRMATIVE COVENANTS.
The Borrower covenants and agrees that from the date hereof until payment
and performance in full of all Obligations, and until the termination of this
Agreement, unless the Bank otherwise consents in writing, the Borrower shall:
Section 8.1 Reporting Requirements. Deliver or caused to be delivered
to the Bank (a) on the last Business Day of each month, a borrowing base
certificate in form, scope and substance satisfactory to the Bank, signed by the
chief financial officer or the president of the Borrower and current as of such
day, setting forth in sufficient detail, among other things, the calculation of
the Borrower's borrowing base for Advances and loan reconciliation (each, a
"BORROWING BASE CERTIFICATE"), which certificate shall be accompanied by such
supporting and verification documentation as the Bank shall request; (b) within
fifteen (15) days after the close of each month (other than the last month of
each calendar quarter) a written recap of the agings of all Accounts of the
Borrower; (c) within fifteen (15) days after the close of each calendar
quarter, a detailed written aging report of all Accounts (detailing, among
other things, the amounts due from each Account Debtor) which shall be in form,
scope, and content satisfactory to the Bank, (d) within forty five (45) days
after the close of each of the first three fiscal quarters of the Borrower,
(i) a written statement signed by the chief financial officer or president of
the Borrower certifying that the Borrower is in compliance with all of its
covenants set forth in the Financing Agreements, including without limitation,
the Financial Covenants set forth in Article VIII C., and (ii) internally
prepared financial statements of the Borrower, including a balance sheet as of
the end of each such month and statements of income and expense for such
quarter and for the portion of the Borrower's fiscal year to date then ended,
prepared in conformity with GAAP, applied on a basis consistent with that of
the preceding period, and certified by the chief financial officer as being
accurate and fairly presenting the financial position of the Borrower,
(e) within one hundred twenty (120) days after the close of each fiscal year of
the Borrower, financial statements of the Borrower as of the close of such
fiscal year and statements of income and retained earnings and source and
application of funds for the year then ended, prepared in conformity with GAAP,
applied on a basis consistent with that of the preceding year or containing
disclosure of the effect on financial position or results of operations of any
change in the application of accounting principles during the year, and audited
by a firm of independent certified public accountants selected by the Borrower
and acceptable to the Bank and accompanied by an unqualified auditor's report;
(f) copies of all reports on Forms 10k, 10Q and 8k and all other reports filed
by Borrower with the Securities and Exchange Commission; (g) promptly upon the
Bank's written request, such other information about the
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financial condition and operations of the Borrower as the Bank may, from time to
time, reasonably request; and (h) promptly upon becoming aware of the occurrence
of any Defaulting Event, written notice of such occurrence signed by the
president or chief financial office of the Borrower describing such occurrence
and the steps, if any, being taken to cure the Defaulting Event.
Section 8.2. Insurance and Endorsements. (a) Keep its properties insured
against fire and other hazards (so-called "All Risk" coverage) in amounts and
with companies satisfactory to the Bank to the same extent and covering such
risks as is customary in the same or a similar business; maintain public
liability coverage, including without limitation, products liability coverage,
against claims for personal injuries or death; and maintain all worker's
compensation, employment or similar insurance as may be required by applicable
law; (b) All insurance shall contain such terms, be in such form, and be for
such periods reasonably satisfactory to Bank, and be written by such carriers
duly licensed by the appropriate states where any Collateral is located and
reasonably satisfactory to the Bank. Without limiting the generality of the
foregoing, such insurance must provide that it may not be canceled without
thirty (30) days prior written notice to the Bank. The Borrower shall cause the
Bank to be endorsed as a loss payee (as its interests may appear) with a long
form Lender's Loss Payable Clause, in form and substance acceptable to the Bank
on all such insurance. In the event of failure to provide and maintain insurance
as herein provided, the Bank may, at its option, provide such insurance and
charge the amount thereof to the Loan Account. The Borrower shall furnish to the
Bank certificates or other satisfactory evidence of compliance with the
foregoing insurance provisions. The Borrower hereby irrevocably appoints the
Bank as its attorney-in-fact, coupled with an interest, to make proofs of loss
and claims for insurance, and to receive payments of the insurance and execute
and endorse all documents, checks and drafts in connection with payment of the
insurance. Any proceeds received by the Bank shall be applied to the Obligations
in such order and manner as the Bank shall determine in its sole discretion.
Section 8.3 Tax and Other Liens. Comply with all statutes and government
regulations and pay all taxes, assessments, governmental charges or levies, or
claims for labor, supplies, rent and other obligations made against it or its
property which, if unpaid, might become a Lien or charge against the Borrower or
its properties, except liabilities being contested in good faith and against
which, if requested by the Bank, the Borrower shall set up reserves in amounts
and in form satisfactory to the Bank.
Section 8.4 Place of Business. Maintain its principal place of business
and chief executive offices at the address set forth in the first paragraph of
this Agreement, unless the Borrower shall have given the Bank thirty (30) days
prior written notice of any change in such places of business.
Section 8.5 Inspections. At any time following a Defaulting Event and
upon reasonable prior notice if no Defaulting Event has occurred, allow the Bank
by or through any of its officers, attorneys, and/or accountants designated by
it, for the purpose of ascertaining whether or not each and every provision
hereof and of any related agreement, instrument and document is being performed,
to enter the offices and plants of the Borrower at any time during normal
business hours to examine or inspect any of the properties, books and records or
extracts therefrom, to make copies of such books and records or extracts
therefrom, and cause its officers and employees to give full cooperation and
assistance to the Bank in connection therewith.
Section 8.6 Litigation. Promptly advise the Bank of the commencement of
any action, suit, proceeding or investigation of any kind pending against the
Borrower before any court, tribunal or administrative agency or board which, if
adversely determined, might, either in any case or in the aggregate, have a
Material Adverse Effect, considered as a whole, or the Borrower considered
individually, or materially impair the right of the Borrower to carry on
business substantially as now conducted, or result in any liability not
adequately covered by insurance, or which questions the validity of any of the
Financing Agreements or any action taken or to be taken pursuant hereto or
thereto.
Section 8.7 Maintenance of Existence and Compliance. Maintain and
preserve its corporate existence and comply with all valid and applicable
statutes, rules and regulations and maintain its properties in good repair,
working order and operating condition.
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Section 8.8 ERISA. Immediately notify Bank of any event which causes it
to fail to comply in all material respects with ERISA.
Section 8.9 Notice of Certain Events. Give prompt written notice to Bank
of:
(a) any dispute that may arise between the Borrower and any
governmental regulatory body or law enforcement agency;
(b) any labor controversy resulting or likely to result in a
strike or work stoppage against the Borrower;
(c) any proposal by any public authority to acquire the assets
or business of the Borrower;
(d) the location of any Collateral other than at the Borrower's
places of business disclosed in this Agreement other than Collateral in transit
in the ordinary course of the Borrower's business;
(e) any proposed or actual change of the name, identity or
corporate structure of the Borrower;
(f) any circumstance or event by virtue of which or in
connection with which the Borrower has incurred or may incur any liability,
expense or responsibility under any Environmental Law;
(g) any matter which has or is reasonably likely to have a
Material Adverse Effect; and
(h) any information received by the Borrower with respect to
Accounts that may materially affect the value thereof or the rights and remedies
of Bank with respect thereto.
Section 8.10 Account Duties. Continue to comply with any and all federal
state and local laws affecting its business, including, but not limited to,
payment of all federal and state taxes with respect to the sales to Account
Debtors by the Borrower and disclosures in connection therewith. The Borrower
agrees to indemnify Bank against and hold Bank harmless from, all claims,
actions and losses, including reasonable attorney's fees and costs incurred by
the Bank arising from any contention, whether well founded or otherwise, that
there has been a failure to comply with such laws.
Section 8.11 Collateral Duties. Do whatever the Bank reasonably may
request from time to time by way of obtaining, executing, delivering and filing
security agreements and/or financing statements, and other notices and
amendments and renewals thereof, and the Borrower will take any and all steps
and observe such formalities as Bank may reasonably request, in order to create
and maintain a valid and enforceable first Lien upon, pledge of, and first
priority security interest in, any and all of the Collateral, except for a lien
in favor of DECD in the machinery and equipment of Borrower. The Bank is
authorized to file financing statements without the signature of the Borrower
and to execute and file such financing statements on behalf of the Borrower as
specified by the UCC to perfect or maintain its security interest in all of the
Collateral. All charges, expenses and fees the Bank may incur in filing any of
the foregoing, together with costs and expenses of any lien search required by
the Bank, and any taxes relating thereto, shall be charged to the Borrower's
Account and added to the Obligations. The Borrower hereby irrevocably
constitutes the Bank as its attorney-in-fact to issue in the name and execute or
endorse on behalf of the Borrower each and every financing statement, notice,
instrument and document necessary to carry out the purposes of the provisions of
this Section 8.11. The power of attorney granted hereby shall be self-executing,
but the Borrower shall promptly execute and deliver to the Bank, upon written
request of the Bank, such additional separate powers of attorney as the Bank may
from time to time request.
Section 8.12. Audit by Bank: Fees. Permit the Bank or its agents to audit
the books and records of the Borrower and to conduct or cause to be conducted
audits and/or appraisals of the Borrower's assets at such times and in such
manner and detail as the Bank deems reasonably necessary, in the Bank's
discretion. In the case of any audit prior to the occurrence of a Defaulting
Event, the Bank shall provide the Borrower with reasonable advance
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notice of the business records and personnel that the Bank will require access
to in connection with such audit. The Borrower acknowledges the Bank's
intention to conduct four (4) audits per calendar year, on a quarterly basis
unless a Defaulting Event shall have occurred. Without limiting the generality
of the foregoing, the Bank shall be allowed to request the Borrower to verify
the Accounts of the Borrower and following a Defaulting Event, in the Bank's
name, to confirm with Account Debtors the validity and amount of Accounts. The
Borrower shall promptly pay to the Bank a $1,000 audit fee and any out of
pocket expenses incurred in connection with any such audit. The Bank may charge
any such audit fees and out-of-pocket expenses to the Borrower's Account.
Section 8.13 Notice of Reportable Events. Upon the occurrence of any
"Reportable Event" as defined in Section 4043 of the Code, with respect to any
Plan now or hereafter maintained by the Borrower to which such statute may be
applicable, whether or not notice thereof is required to be given to any
person, governmental agency or the PBGC, give prompt written notice of such
occurrence to Bank signed by the president or chief financial officer of the
Borrower describing such occurrence and the steps, if any, being taken to cure
the Reportable Event.
B. NEGATIVE COVENANTS
The Borrower covenants and agrees that from the date hereof until payment
and performance in full of all Obligations, and until the termination of this
Agreement, unless the Bank otherwise consents in writing, the Borrower shall
not:
Section 8.14 Encumbrances; Negative Pledge. Incur or permit to exist any
Lien, mortgage, charge or other encumbrance against the Property or any of the
Collateral, whether now owned or hereafter acquired, except: (a) Liens required
or expressly permitted by this Agreement; (b) Permitted Liens; and (c) those
Liens and encumbrances listed on Schedule 6.1(i) attached hereto.
Section 8.15 Limitation on Indebtedness. Create, incur or guarantee any
indebtedness or obligation for borrowed money (including without limitation,
any reimbursement obligations for any letter of credit issued by any financial
institution) from, or issue or sell any of its obligations to any lender other
than the Bank, except for indebtedness to the lenders described in Schedule
6.1(i) (but no renewals, extensions or refinancing thereof).
Section 8.16 Contingent Liabilities. Assume, guarantee, endorse or
otherwise become liable upon the obligations of any person, firm or
corporation, or enter into any purchase or option agreement or other
arrangement having substantially the same effect as such a guarantee, except by
the endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business.
Section 8.17 Consolidation, Merger or Corporate Changes. (a) Merge into
or consolidate with or into any corporation or other entity, (b) make any
material change in its corporate structure or identity, or (c) enter into any
agreement to do any of the foregoing.
Section 8.18 Loans, Advances, Investments. Make or permit to exist any
loans or advances to, or purchase any stock, other securities or evidences of
indebtedness of, or make or permit to exist any investment (including without
limitation, the acquisition of stock of a corporation) or acquire any assets or
any other interest whatsoever in, any affiliate or other related entity
(including without limitation, any partnership, joint venture, joint stock
corporation or parent or subsidiary corporation) or any other person.
Section 8.19 Acquisition of Stock of the Borrower; Distributions.
Purchase, acquire, redeem or retire, or make any commitment to purchase,
acquire, redeem or retire any of its capital stock, whether now or hereafter
outstanding, or declare and/or pay or otherwise make any Distribution to any of
its shareholders.
Section 8.20 Sale and Lease of Assets. Sell, lease or otherwise dispose
of any of its assets, except for sales of Inventory in the ordinary course of
its business and the disposal of obsolete assets in the ordinary course of its
business.
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Section 8.21 Name Changes. Change its corporate name or conduct its
business under any trade name or style other than as set forth in this
Agreement.
Section 8.22 Prohibited Transfers. Transfer, in any manner, either
directly or indirectly, any cash, property, or other assets to any parent or
any of its affiliates or subsidiaries, other than sales made in the ordinary
course of business and for fair consideration on terms no less favorable than
if such sale had been an arms-length transaction between the Borrower or such
subsidiary or affiliate and an unaffiliated entity.
Section 8.23 No Management/Ownership Change. Suffer any change in its
management which the Bank deems in its sole discretion, to be a material change.
Section 8.24 Leasebacks. Lease any real estate or other Capital Asset
from any lessor who shall have acquired such property from the Borrower.
Section 8.25 Loans to Officers, Shareholders, Directors and Employees.
Make any loan or advance, directly or indirectly, to any of its officers,
shareholders, directors or employees.
Section 8.26 Bank Accounts with Other Lenders. Maintain its principal
operating or other depository account with any other lender to the Borrower
other than the Bank.
C. FINANCIAL COVENANTS
The Borrower covenants and agrees that from the date hereof until payment
and performance in full of all Obligations, and until the termination of this
Agreement, unless the Bank otherwise consents in writing, the Borrower shall
not:
Section 8.27 Leverage Ratio. Permit its Leverage Ratio to be greater
than 1.1 to 1.0 as at the end of any fiscal quarter of the Borrower.
Section 8.28 Current Ratio. Permit its Current Ratio to be less than 2.4
to 1.0 as at the end of any fiscal quarter of the Borrower.
Section 8.29 Debt Service Coverage Ratio. Permit its Debt Service
Coverage Ratio to be less than 1.5 to 1.0 as at the end of Borrower's fiscal
year.
Section 8.30 Minimum Tangible Net Worth. Permit its Tangible Net Worth
to be less than $2,500,000 as at the end of any fiscal quarter of the Borrower.
Section 8.31 Trade Payables Days. Permit the quotient determined by
dividing its Trade Payables Ratio into 365 to be greater than forty five (45)
as at the end of any fiscal quarter of the Borrower.
ARTICLE IX
COLLATERAL
Section 9.1 Grant. To secure the prompt payment and performance of each
and all of the Obligations, the Borrower pledges, assigns, transfers and grants
to the Bank a continuing first Lien (except for the lien on Borrower's
machinery and equipment in favor of DECD) security interest in all tangible and
intangible personal property of the Borrower, whether now owned or hereafter
acquired by the Borrower, including without limitation, all Accounts, Chattel
Paper, Contracts, Documents, Equipment, General Intangibles, Instruments and
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Inventory, together, in each instance, with the renewals, substitutions,
replacements, additions, rental payments, products and Proceeds thereof
(hereinafter, collectively called the "Collateral").
Section 9.2 Continuous Security Interest. The Borrower expressly
acknowledges that the security interest granted hereunder shall remain as
security for payment and performance of the Obligations, whether now existing
or which may hereafter be incurred by future advances or otherwise. The notice
of the continuing grant of this security interest therefore shall not be
required to be stated on the face of any document representing any such
Obligations, nor otherwise identify it as being secured hereby.
Section 9.3 Investment Property. The Borrower expressly acknowledges
and agrees that, in applying the law of any jurisdiction that has now or
hereafter enacted all or substantially all of the uniform revision of Article 8
of the Uniform Commercial Code, with new provisions added to Article 9
contemplated by such revision, all as approved in 1994 by the American Law
Institute and the National Conference of Commissioners on Uniform State Laws,
the Collateral description set forth in Section 9.1 above shall be deemed to
include "investment property" as defined in such new provisions of Article 9,
it being the intention of the Borrower that such collateral be included in such
Collateral description, whether prior to or after the effectiveness of such
jurisdiction.
ARTICLE X
EVENTS OF DEFAULT, ACCELERATION
SECTION 10.1 Events of Default, Acceleration. If any one or more of the
following events (herein called "EVENTS OF DEFAULT" and individually, an "EVENT
OF DEFAULT") shall occur and be continuing: (a) failure of the Borrower to pay
principal, any installment of interest or any other sum due hereunder or under
the Note when due and payable; (b) failure of the Borrower to pay the
outstanding Advances upon termination of the Facility by the Bank or the
Borrower; (c) breach of any material representation, warranty, covenant or
agreement contained in, or failure by the Borrower to perform any material act,
duty or Obligation as required by, this Agreement, or any other Financing
Agreement, specifically including, but not limited to, breach of any of the
Financial Covenants set forth in Article VIII C. hereof; (d) the making by the
Borrower of any misrepresentation of a material fact to the Bank; (e) loss,
theft, or destruction of a material portion of the Collateral which is not
covered by insurance with Lender's loss payee endorsement as required herein;
(f) the filing, making or issuance of any levy, seizure, attachment, judgment
or injunction upon or against the Borrower, the Collateral, or any other
property or assets of the Borrower; (g) the assertion or claim against any or
all of the Collateral of a Lien that would or allege to be senior in priority
to the Bank's Lien on such Collateral, except for the lien on Borrower's
machinery and equipment in favor of the DECD; (h) if there shall remain in
force, undischarged, unsatisfied and unstayed, for more than sixty (60) days,
whether or not consecutive, any final judgment against the Borrower, which
individually or together with other undischarged, unsatisfied and unstayed
final judgments against the Borrower, exceeds $25,000; (i) the Borrower is no
longer Solvent, or the dissolution, business failure, appointment of a receiver
or custodian, assignment for the benefit of creditors or the commencement of
any proceedings under any bankruptcy or insolvency law by, against or of the
Borrower; (j) calling of a meeting of creditors, appointment of a committee of
creditors or liquidating banks, or offering of a composition extension to
creditors by, for or of the Borrower; (k) the loss, revocation or failure to
renew any regulatory license and/or permit now held or hereafter acquired by
the Borrower which has a Material Adverse Effect; (l) the occurrence of a
default or event of default (howsoever defined) under any of other Financing
Agreements or under any other instrument, document or agreement between the
Bank and the Borrower; (m) if the Borrower shall default (as principal or
guarantor or other surety) in the payment of any Indebtedness created or
incurred for borrowed money or shall default in the performance of or
compliance with any other obligation contained in any agreement or instrument
evidencing or securing such Indebtedness, and such default gives to the holder
of such Indebtedness the right to accelerate the Indebtedness (whether or not
the holder has, in fact, accelerated such Indebtedness), or the right to take
action with respect to any collateral securing such Indebtedness, and such
default shall continue for longer than the period of grace, if any, specified
therein; (n) the service of any process upon the Bank seeking to attach or
garnish by mesne or trustee process any funds of the Borrower which are on
deposit with the Bank, except where the enforcement of such attachment or
garnishment is contested by the
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Borrower and effectively stayed; (o) the Borrower is indicted for any offense
that carries a penalty that includes the seizure or potential seizure of any of
the Collateral which, if seized, would have a Material Adverse Effect; (p) the
Bank believes in good faith that a Material Adverse Effect has occurred since
the date of the Borrower's most recent financial statements delivered to the
Bank before or after the date of this Agreement, the result of which causes the
Bank to believe in good faith that its security has been impaired or its risk
of non-collection has increased, then (1) upon the happening of any Event of
Default set forth in subsections (i) and (j) above, any requirement upon the
Bank to make further Advances shall, notwithstanding any time or credit allowed
by any note or agreement, automatically and immediately terminate and any and
all Obligations shall automatically become immediately due and payable, without
presentment, demand, protest, notice of protest or other notice or requirements
of any kind, all of which are expressly waived by the Borrower, and (2) upon
the happening of any one or more of the other Events of Default, any
requirement upon the Bank to make further Advances shall, at the option of the
Bank and notwithstanding any time or credit allowed by any note or agreement,
terminate and any and all Obligations shall, at the option of the Bank, become
immediately due and payable, without presentment, demand, protest, notice of
protest or other notice or requirements of any kind, all of which are expressly
waived by the Borrower. The Bank may proceed to enforce the rights of the Bank
whether by suit in equity or by action at law, whether for specific performance
of any covenant or agreement contained in this Agreement, the Note or the other
Financing Agreements, or in aid of the exercise of any power granted in either
this Agreement or the Note or any other Financing Agreement, or it may proceed
to obtain judgment or any other relief whatsoever appropriate to the
enforcement of such rights, or proceed to enforce any legal or equitable right
which the Bank may have by reason of the occurrence of any Event of Default
hereunder.
ARTICLE XI
COLLECTIONS
Section 11.1 Deposits. If at any time in the Bank's discretion, the Bank
determines there is a deterioration in the Borrower's financial condition or
any erosion in the value of the Collateral, the Bank may notify the Borrower's
Account Debtors and direct that all proceeds of notes, instruments and Accounts
of the Borrower shall be collected into the cash collateral account established
by Borrower with the Bank. Pursuant to notices substantially in the form of
Exhibits C-1 and C-2 hereto, the Borrower and the Bank shall direct each of the
Borrower's Account Debtors to make all payments to the Borrower directly into
the cash collateral account. In the event that the Borrower shall receive any
proceeds of notes, instruments and Accounts following such notice to its
Account Debtors, the Borrower shall receive and hold the same in trust for the
Bank and immediately remit to the Bank by depositing the same into the cash
collateral account, as well as all proceeds from the sale of Inventory.
Borrower agrees that all payments received in the cash collateral account shall
be under the dominion and control of, and the sole and exclusive property of the
Bank. The Bank will, upon receipt of good funds into the cash collateral
account, at its sole discretion either (i) credit such payments to the
principal amount of the Advances, accrued interest thereon, any other unpaid
Obligations, any outstanding fees and/or any other amounts payable under this
Agreement, in such order and manner of priority as the Bank shall determine, in
its sole discretion, or (ii) remit the proceeds of such payments to the
Borrower. Collections of Accounts which are credited to the Obligations of the
Borrower shall be credited on the day of actual receipt by the Bank; provided,
however, that all credits shall be conditional credits subject to collection
and that returned items, at Bank's option, may be charged to the Borrower.
ARTICLE XII
RIGHTS AND REMEDIES OF BANK
Section 12.1 Remedies of the Bank. Upon the occurrence and during the
continuance of any Event of Default, the Bank shall have in any jurisdiction
where enforcement hereof is sought, in addition to all other rights
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and remedies which the Bank may have under law and equity, the following rights
and remedies, all of which may be exercised with or without further notice to
the Borrower and without a prior judicial or administrative hearing or notice,
which notice and hearing are expressly waived: to occupy any of the Borrower's
premises for such period of time as the Bank reasonably believes to be
necessary but in any event no later than six (6) months, rent free for the
purposes of liquidating Collateral, including without limitation, conducting an
auction thereon; to enforce or foreclose the Liens and security interests
created under this Agreement or under any other agreement relating to
Collateral by any available judicial procedure or without judicial process; to
enter any premises where any Collateral may be located for the purposes of
taking possession or removing the same; to sell, assign, lease, or otherwise
dispose of Collateral or any part thereof, either at public or private sale, in
lots or in bulk, for cash, on credit or otherwise, with or without
representations or warranties, and upon such terms as shall be acceptable to
the Bank, all at the Bank's sole option and as the Bank in its sole discretion
may deem advisable; to bid or become purchaser at any such sale if public;
and, at the option of the Bank, to apply or be credited with the amount of all
or any part of the Obligations owing to the Bank against the purchase price bid
by the Bank at any such sale.
Section 12.2 Collection of Accounts, Etc. Without in any way limiting the
Borrower's obligations under Section 11.1 hereof, at any time after the
occurrence and during the continuance of an Event of Default, the Bank shall
have the right to require the Borrower to and the Borrower shall, upon written
notice from the Bank:
(a) Assign or endorse its Accounts to the Bank, and notify
Account Debtors that the Accounts owing by them to the Borrower have been
assigned and should be paid directly to the Bank;
(b) Turn over to the Bank all Inventory returned in connection
with any of the its Accounts;
(c) Mark or stamp each of its individual ledger sheets or cards
pertaining to its Accounts with the legend "Assigned to Webster Bank" and stamp
or otherwise mark and keep its books, records, documents and instruments
relating to its Accounts in such manner as the Bank may require; and
(d) Mark or stamp all invoices with a legend satisfactory to
the Bank so as to indicate that the same should be paid directly to the Bank.
Section 12.3 Specific Powers. The Bank may at any time, before (with
respect only to subsections (c), (g) and (j) below) or after the occurrence of
an Event of Default, at the Bank's sole discretion: (a) give notice of
assignment to any Account Debtor; (b) collect the Accounts of the Borrower
directly and charge, or cause to be charged, the collection costs and expenses
to the Loan Account; (c) collect Accounts submitted by the Borrower to the Bank
for collection and charge, or cause to be charged, the collection costs and
expenses to the Loan Account; (d) settle or adjust disputes and claims directly
with Account Debtors for amounts and upon terms which the Bank considers
advisable, and credit, or cause to be credited, the Loan Account with the net
amounts received in payment of the Accounts of the Borrower; (e) exercise all
other rights granted in this Agreement and the other Financing Agreements; (f)
receive, open and dispose of all mail addressed to the Borrower and notify the
Post Office authorities to change the address for delivery of the Borrower's
mail to an address designated by the Bank; (g) endorse the name of the Borrower
on any checks or other evidence of payment that may come into possession of the
Bank and on any invoice, freight or express bill, bill of lading or other
document; (h) in the name of the Borrower or otherwise, demand, sue for,
collect and give acquittance for any and all monies due or to become due on
its Accounts; (i) compromise, prosecute or defend any action, claim or
proceeding concerning the Accounts of the Borrower; and (j) do any and all
things necessary and proper to carry out the purposes contemplated in this
Agreement, the other Financing Agreements and any other agreement between the
parties. Neither the Bank nor any person acting as its agent or attorney
hereunder shall be liable for any acts or omissions or for any error of
judgment or mistake of fact or law, except for bad faith or willful misconduct.
For the purposes of this Section 12.3, the Borrower hereby irrevocably
constitutes the Bank as its attorney-in-fact to issue in the name and execute
or endorse on behalf of the Borrower each and every notice, instrument and
document necessary to carry out the purposes of the provisions of this Section
12.3. The power of attorney granted hereby shall be self-executing, but the
Borrower shall promptly execute and deliver to the Bank, upon written request
of the Bank, such additional separate powers of attorney as the Bank may from
time to time request. Notwithstanding the foregoing, it is understood that the
Bank is under no duty to take any of the foregoing actions and that after
having made demand
-24-
<PAGE> 25
upon the Account Debtors for payment, the Bank shall have no further duty as to
the collection or protection of the Accounts of the Borrower or any income
therefrom and no further duty to preserve any rights pertaining thereto, other
than the safe custody thereof.
Section 12.4 RIGHT OF THE BANK TO USE AND OPERATE COLLATERAL, ETC. Upon
the occurrence and during the continuance of any Event of Default, the Bank
shall have the right and power to take possession of all or any part of the
Collateral, and to exclude the Borrower and all persons claiming under the
Borrower wholly or partly therefrom, and thereafter to hold, store, and/or use,
operate, manage and control the same. Upon any such taking of possession, the
Bank may, from time to time, at the expense of the Borrower, make all such
repairs, replacements, alterations, additions and improvements to the Collateral
as the Bank may deem proper. In any such case the Bank shall have the right to
manage and control the Collateral and to carry on the business and to exercise
all rights and powers of the Borrower in respect thereto as the Bank shall
reasonably deem best, including the right to enter into any and all such
agreements with respect to the operation of the Collateral or any part thereof
as the Bank may see fit; and the Bank shall be entitled to collect and receive
all issues, profits, fees, revenues and other income of the same and every part
thereof. Such issues, profits, fees, revenues and other income shall be applied
to pay the expenses of holding and operating the Collateral and of conducting
the business thereof, and of all maintenance, repairs, replacements,
alterations, additions and improvements, and to make all payments which the Bank
may be required or may elect to make, if any, for taxes, assessments, insurance
and other charges upon the Collateral or any part thereof, and all other
payments which the Bank may be required or authorized to make under any
provision of this Agreement (including legal costs and attorneys' fees). The
remainder of such issues, profits, fees, revenues and other income shall be
applied to the payment of the Obligations in such order of priority as the Bank
shall determine, in its sole discretion. Without limiting the generality of the
foregoing, the Bank shall have the right to apply for and have a receiver
appointed by a court of competent jurisdiction in any action taken by the Bank
to enforce its rights and remedies hereunder in order to manage, protect and
preserve the Collateral and continue the operation of the business of the
Borrower and to collect all revenues and profits thereof and apply the same to
the payment of all expenses and other charges of such receivership including the
compensation of the receiver and to the payment of the Obligations as aforesaid
until a sale or other disposition of such Collateral shall be finally made and
consummated.
Section 12.5 DUTIES AFTER DEFAULT. Upon the occurrence and during the
continuance of an Event of Default, the Borrower will, at the Bank's request,
assemble all Collateral and make it available to the Bank at places which the
Bank may reasonably select, whether at the premises of the Borrower or elsewhere
and will make available to the Bank all premises and facilities of the Borrower
for the purpose of the Bank taking possession of Collateral or of removing or
putting the Collateral in salable form. In the event any goods called for in any
sales order, contract, invoice or other instrument or agreement evidencing or
purporting to give rise to any Account shall not have been delivered or shall be
claimed to be defective by any customer, the Bank shall have the right in its
discretion to use and deliver to such customer any goods of the Borrower to
fulfill such order, contract or the like so as to make good any such Account. If
any Collateral shall require repairing, maintenance, preparation, or the like,
or is in process or other unfinished state, the Bank shall have the right, but
shall not be obligated, to do such repairing, maintenance, preparation,
processing or completion of manufacturing for the purpose of putting the same in
such salable form as the Bank shall deem appropriate, but the Bank shall have
the right to sell or dispose of such Collateral without such processing. The net
cash proceeds resulting from the collection, liquidation, sale, lease or other
disposition of Collateral shall be applied first to the expenses (including all
reasonable attorney's and professional fees) of retaking, holding, storing,
processing and preparing for sale, selling, collecting, liquidating and the like
and then to the satisfaction of all Obligations, application as to particular
Obligations or against principal or interest to be at the Bank's sole
discretion. In the event the proceeds of any sale, lease or other disposition of
the Collateral hereunder, including without limitation, the proceeds from the
collection of the Accounts of the Borrower, are insufficient to pay all of the
Obligations in full, the Borrower will be liable for the deficiency, together
with interest thereon, at the maximum rate allowable by law, and the costs and
expenses of collection of such deficiency, including without limitation,
attorneys' fees, expenses and disbursements.
Section 12.6 CUMULATIVE REMEDIES. The enumeration of the Bank's rights
and remedies set forth in this Article XII is not intended to be exhaustive and
the exercise by the Bank of any right or remedy shall not preclude the exercise
of any other rights or remedies, all of which shall be cumulative and shall be
in addition to any
-25
<PAGE> 26
other right or remedy given hereunder or under any other agreement between the
parties or which may now or hereafter exist on law or at equity by suit or
otherwise. No delay or failure to take action on the part of the Bank in
exercising any right, power or privilege hereunder or under any of the other
Financing Agreements shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or privilege preclude other or further
exercise thereof or the exercise of any other right, power or privilege or shall
be construed to be a waiver of any Defaulting Event.
ARTICLE XIII
TERMINATION
Section 13.1 TERM AND TERMINATION. Unless sooner terminated as a result
of (i) the occurrence of a Defaulting Event, or (ii) payment of all Obligations
and termination of the Facility prior to the Termination Date, the obligation
of the Bank to make Advances shall terminate on the Termination Date. The Bank
may, in its sole and absolute discretion upon written notice to the Borrower
and Borrower's written acceptance of such renewal, elect to renew the Facility
for an additional period of time and on such other terms and conditions as the
Bank shall determine in its sole discretion, in which case the Termination
Date shall be extended for a corresponding period. Upon any termination of the
Facility (A) the Borrower shall pay the entire balance of the Advances without
demand or notice,and (B) all of the rights, interests and remedies of the Bank
and Obligations of the Borrower shall survive and the Borrower shall have no
right to receive or request, and the Bank shall have no obligation to make or
issue any further Advances. Upon full and final payment of the Obligations to
the Bank, all rights and remedies of the Borrower and the Bank hereunder shall,
subject to Section 15.1 and 15.2 hereof, cease.
ARTICLE XIV
EXPENSES
Section 14.1 EXPENSES. The Borrower agree to pay all reasonable
out-of-pocket expenses, costs, fees, charges, expenses and attorneys' and other
professionals' fees and expenses incurred by the Bank in connection with the
preparation of this Agreement, the Note, the other Financing Agreements and any
amendments or supplements hereto and thereto and all expenses (including fees
and expenses of the Bank's counsel) incidental to the collection of monies due
hereunder or thereunder and in any way connected with, involving or related to
the preservation, enforcement, protection or defense of this Agreement, the
Note, the other Financing Agreements, any related agreement, document or
instrument, the Collateral, and the rights and remedies hereunder or thereunder
whether incurred prior to or subsequent to commencement of any bankruptcy
proceeding.
-26-
<PAGE> 27
ARTICLE XV
MISCELLANEOUS
Section 15.1 INDEMNIFICATION
(a) In consideration of the Bank's execution and delivery of
this Agreement and Bank's extension of the Facility and in addition to all
other obligations of the Borrower under this Agreement, the Borrower hereby
agrees to defend, protect, indemnify and hold harmless Bank, its successors,
assigns, officers, directors, employees and agents (including without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the "INDEMNITEES") from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages and expenses in connection therewith (irrespective of
whether any such Indemnitees is a party to any action for which indemnification
hereunder is sought), and including reasonable attorneys' fees and
disbursements as and when incurred (the "INDEMNIFIABLE LIABILITIES") incurred
by the Indemnitees or any of them as a result of, or arising out of, or
relating to (i) the execution, delivery, performance or enforcement of this
Agreement and the other Financing Agreements and any instrument, document or
agreement executed pursuant hereto to any of the Indemnitees; (ii) the Bank's
status as lender to, or creditor of, the Borrower; or (iii) the operation of
the Borrower's business from and after the date hereof, including without
limitation those arising under any Environmental Laws. To the extent that the
foregoing undertaking by the Borrower may be unenforceable for any reason, the
Borrower shall make the maximum contribution to the payment and satisfaction of
each of the Indemnifiable Liabilities which is permissible under applicable law.
(b) The Borrower hereby covenants and agrees at all times to
indemnify, hold harmless and defend the Indemnitees, whether as secured party
in possession or as successor in interest to the Borrower as owner of any
personal property assets located on any of the Premises, by virtue of any
action taken by the Bank pursuant to the Financing Agreements, the UCC or
otherwise from and against any and all liabilities, losses, damages, costs,
expenses, penalties, fines, causes of action, suits, claims, demands or
judgements, including without limitation, attorneys' fees and expenses,
suffered or incurred in connection with: (i) the Environmental Laws, including
without limitation, Liens or claims of any federal, state or municipal
government or quasi-governmental agency or any third person, whether arising
under the Environmental Laws or any other federal, state or municipal law or
regulation; (ii) any spill or contamination affecting the Premises, including
without limitation, any Hazardous Materials or other waste-like or toxic
substances located on, under, emanating from or relating to the Premises from
and on and after the date hereof or any portion thereof or any property
contiguous to the Premises from and after the date hereof, and including
without limitation, any loss of value of the Premises as a result of any such
spill or contamination; and (iii) the direct or indirect installation, use,
generation, manufacture, production, storage, release, threatened release,
discharge, disposal or presence of any Hazardous Materials, on, under or about
the Premises or any portion thereof, from and including all consequential
damages, the costs of any required or necessary repair, cleanup or
detoxification, and the costs of the preparation and implementation of any
closure, remedial or other required plans. Further, the mere fact that such
Indemnified Party has been declared an "owner" or "operator" (as such term is
defined in any Environmental Law) resulting from the Indemnified Party having
taking possession of any of the Collateral shall not exonerate the Borrower
from any claim by the Indemnified Parties seeking such indemnification.
Section 15.2 PAYMENT SET-ASIDE. To the extent that the Borrower, or any
other person makes a payment or payments to the Bank (whether hereunder, under
the Note or under the other Financing Agreements) with respect to the
Obligations, or the Bank enforces its security interests or rights or exercises
its right of setoff and such payment or payments or the proceeds of such
enforcement or setoff or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the
Borrower, or such other person, a trustee, receiver or any other person under
any law (including, without limitation, any bankruptcy law, state or federal
law, common law or equitable cause of action) in each case in connection with
any bankruptcy or similar proceeding involving the Borrower, or such other
person, then to the extent of any such restoration, the Obligation or part
thereof originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such
-27-
<PAGE> 28
enforcement or setoff had not occurred, whereupon this Agreement shall be
automatically reinstated without any further action by the Borrower and the
Bank and continue to be fully applicable to such Obligation to the same extent
as though the payment so repaid or recovered had never been originally made on
such Obligation.
Section 15.3 SET-OFF. The Borrower hereby gives the Bank a Lien and
right of setoff for all its liabilities to the Bank upon and against all its
deposits, credits, collateral and property now or hereafter in the possession
or control of the Bank or in transit to it. The Bank may, upon the occurrence
of a Defaulting Event, apply or set off the same, or any part thereof, to any
liability of the Borrower to the Bank, even though unmatured.
Section 15.4 COVENANTS TO SURVIVE. All covenants, agreements, warranties
and representations made herein, in the Note, in the other Financing
Agreements, and in all certificates or other documents of the Borrower shall
survive the advances of money made by the Bank to the Borrower hereunder and
the delivery of the Note, and the other Financing Agreements, and all such
covenants, agreements, warranties and representations shall be binding upon
and inure to the benefit of the Bank, the Borrower and their respective
successors and assigns, whether or not so expressed, except that the Borrower
shall not have the right to assign their rights hereunder or under any of the
other Financing Agreements or any interest herein or therein.
Section 15.5 CROSS-COLLATERALIZATION. All Collateral which the Bank may
at any time acquire from the Borrower or from any other source in connection
with the Obligations shall constitute collateral for each and every Obligation,
without apportionment or designation as to particular Obligations and that all
Obligations, however and whenever incurred, shall be secured by all Collateral
however and whenever acquired, and the Bank shall have the right, in its sole
discretion, to determine the order in which the Bank's rights in or remedies
against any Collateral are to be exercised and which type of Collateral or
which portions of Collateral are to be proceeded against and the order of
application of proceeds of Collateral as against particular Obligations.
Section 15.6 CROSS-DEFAULT. The Borrower acknowledges and agrees that a
default under any one of the Financing Agreements shall constitute a default
under any of the other Financing Agreements; that a default under any other
indebtedness owing by the Borrower to the Bank, whether now existing or
hereafter arising, shall constitute a default under this Agreement and the
other Financing Agreements; and that a default under any of the Financing
Agreements shall constitute a default under any other indebtedness owing by the
Borrower to the Bank, whether now existing or hereafter arising.
Section 15.7 AMENDMENTS AND WAIVERS. Neither this Agreement, the Note,
the other Financing Agreements, nor any term, covenant or condition hereof or
thereof may be changed, waived, discharged, modified or terminated except by a
writing executed by the parties hereto or thereto. No course of dealing between
the Borrower and the Bank or its employees shall be effective to change, modify
or discharge any provision of this Agreement or to constitute a waiver of any
Defaulting Event.
Section 15.8 NOTICES. All notices, requests, consents, demands and
other communications hereunder shall be in writing and shall be either hand
delivered or sent by first class mail, or by certified or registered mail,
return receipt requested, or by recognized overnight courier, or by telecopy,
addressed to the respective parties to this Agreement at their respective
addresses set forth in the first paragraph of this Agreement, or, as to each
party, at such other address as shall be designated by such party by written
notice given in accordance with this Section 15.8. All such notices and
correspondence shall be deemed given (a) if sent by first class, certified or
registered mail, two (2) Business Days after being postmarked, or (b) if hand
delivered or sent by overnight courier or by telecopy, when received at the
above stated addresses, whether or not receipt thereof is acknowledged or is
refused by the addressee or any person at such address.
Section 15.9 TRANSFER OF BANK'S INTEREST. The Borrower hereby agrees
that the Bank, in its sole discretion, may freely sell, assign or otherwise
transfer participations, portions, co-lender interests or other interests in
all or any portion of the indebtedness, liabilities or obligations arising in
connection with or in any way related to the financing transactions of which
this Agreement is a part. In the event of any such transfer, the transferee
may, in the Bank's sole discretion, have and enforce all the rights, remedies
and privileges of the Bank. The Borrower consents to the release by the Bank to
any potential transferee of any and all information (including without
-28-
<PAGE> 29
limitation, financial information) pertaining to the Borrower as the Bank, in
its sole discretion, may deem appropriate. If such transferee so participates
with the Bank in making loans or advances hereunder or under any other
agreement between the Bank and the Borrower, the Borrower hereby grants to such
transferee and such transferee shall have and is hereby given a continuing Lien
and security interest in any money, securities or other property of the
Borrower in the custody or possession of such transferee, including the right
to set off under circumstances consistent with this Agreement, to the extent of
such transferee's participation in the Obligations of the Borrower to the Bank.
Section 15.10 Waivers.
(a) Prejudgment Remedy, Etc. THE BORROWER ACKNOWLEDGES THAT THE
ADVANCES EVIDENCED HEREBY ARE COMMERCIAL TRANSACTIONS AND WAIVES THEIR RIGHT TO
NOTICE AND HEARING AS OTHERWISE ALLOWED BY ANY STATE OR FEDERAL LAW WITH
RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE BANK MAY DESIRE TO USE, AND FURTHER
WAIVE ALL RIGHTS TO REQUEST THAT THE BANK POST A BOND, WITH OR WITHOUT SURETY,
TO PROTECT THE BORROWER, OR ANY OTHER ENDORSER, GUARANTOR OR SURETY OF ANY OF
THE OBLIGATIONS AGAINST DAMAGES THAT MAY BE CAUSED BY ANY PREJUDGMENT REMEDY
SOUGHT OR OBTAINED BY BANK. THE BORROWER FURTHER WAIVES DILIGENCE, DEMAND,
PRESENTMENT FOR PAYMENT, NOTICE OF NONPAYMENT, PROTEST AND NOTICE OF ANY
RENEWALS OR EXTENSIONS.
(b) Jury Waiver. THE BORROWER HEREBY WAIVES TRIAL BY JURY IN
ANY COURT IN ANY SUIT, ACTION OR PROCEEDING ON ANY MATTER, ARISING IN
CONNECTION WITH OR IN ANY WAY RELATED TO THE FINANCING TRANSACTIONS OF WHICH
THIS AGREEMENT IS A PART AND/OR THE ENFORCEMENT OF ANY OF THE BANK'S RIGHTS,
INCLUDING WITHOUT LIMITATION, TORT CLAIMS.
(c) Voluntary Nature of Waivers. THE BORROWER ACKNOWLEDGES THAT
IT MAKES THE FOREGOING WAIVERS IN SUBSECTIONS (a) AND (b) ABOVE, KNOWINGLY,
WILLINGLY, WITHOUT DURESS AND VOLUNTARILY AND ONLY AFTER CONSIDERATIONS OF THE
RAMIFICATIONS OF SUCH WAIVERS WITH ITS ATTORNEYS.
Section 15.11 Section Headings, Severability, Entire Agreement. Section
and subsection headings have been inserted herein for convenience only and shall
not be construed as part of this Agreement. Every provision of this Agreement,
the Note and the other Financing Agreements is intended to be severable; if any
term or provision of this Agreement, the Note, the other Financing Agreements,
or any other document delivered in connection herewith shall be invalid,
illegal or unenforceable for any reason whatsoever, the validity, legality and
enforceability of the remaining provisions hereof or thereof shall not in any
way be affected or impaired thereby. All Exhibits and Schedules to this
Agreement shall be annexed hereto and shall be deemed to be part of this
Agreement. This Agreement, the other Financing Agreements, and the Exhibits and
Schedules attached hereto and thereto embody the entire agreement and
understanding between the Borrower and the Bank and supersede all prior
agreements and understandings relating to the subject matter hereof unless
otherwise specified or specifically reaffirmed or restated herein.
Section 15.12 Governing Law. This Agreement and the other Financing
Agreements, and all transactions, assignments and transfers hereunder and
thereunder, and all the rights of the parties, shall be governed as to
validity, construction, enforcement and in all other respects by the laws of he
State of Connecticut (but not its conflicts of law provisions). The Borrower
agrees that the Superior Court for the Judicial District of Hartford/New Britain
or the United States District Court for the District of Connecticut at Hartford
shall have jurisdiction to hear and determine any claims or disputes pertaining
to the financing transactions of which this Agreement is a part and/or to any
matter arising or in any way related to this Agreement or any other agreement
between the Bank and the Borrower expressly submit and consent in advance
to such jurisdiction in any action or proceeding.
-29-
<PAGE> 30
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the date first written above.
Witnessed (as to both):
M.H. RHODES, INC.
By: /s/ Joseph L. Morelli
--------------------------------
Name: Joseph L. Morelli
Title: President
WEBSTER BANK
By: /s/ Conrad A. Thamm
--------------------------------
Name: Conrad A. Thamm
Title: Vice President
STATE OF CONNECTICUT )
) ss. Hartford
COUNTY OF HARTFORD )
Before me, the undersigned, this 3rd day of April, 1997, personally
appeared Joseph L. Morelli, known to me to be the President of M.H. Rhodes,
Inc., and that he as such officer, signer and sealer of the foregoing
instrument, acknowledged the execution of the same to be his free act and deed
individually and as such officer, and the free act and deed of said corporation.
In Witness Whereof, I hereunto set my hand.
/s/ Eileen P. Baldwin
-------------------------------------
Eileen P. Baldwin
Commissioner of the Superior Court
STATE OF CONNECTICUT )
) ss. Hartford
COUNTY OF HARTFORD )
Before me, the undersigned, this 3rd day of April, 1997, personally
appeared Conrad A. Thamm, known to me to be the Vice President of Webster Bank,
and that he as such officer, signer and sealer of the foregoing instrument,
acknowledged the execution of the same to be his free act and deed individually
and as such officer, and the free act and deed of said corporation.
In Witness Whereof, I hereunto set my hand.
John B. Lynch
-------------------------------------
Commissioner of the Superior Court
- 30 -
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION PER SHARE EARNINGS
The computation of earnings per share is made by dividing the Company's
earnings for the fiscal year by the weighted average number of shares of the
Company's common stock outstanding during each year, in conformity with FASB
statement 128.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF COMPANY
M. H. Rhodes (Canada) Limited is a 96% owned subsidiary of M. H. Rhodes,
Inc. On September 30, 1996 the Company ceased active business operation for
Canadian subsidiary and transferred its assets and liabilities to its parent
company, M. H. Rhodes, Inc. The Company's Board of Directors voted for its
dissolution which is currently is process.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,786
<SECURITIES> 0
<RECEIVABLES> 1,312,189
<ALLOWANCES> 0
<INVENTORY> 2,999,584
<CURRENT-ASSETS> 4,366,335
<PP&E> 3,903,808
<DEPRECIATION> 3,182,480
<TOTAL-ASSETS> 5,106,392
<CURRENT-LIABILITIES> 1,524,026
<BONDS> 0
0
0
<COMMON> 225,729
<OTHER-SE> 2,115,752
<TOTAL-LIABILITY-AND-EQUITY> 5,106,392
<SALES> 8,493,936
<TOTAL-REVENUES> 8,493,936
<CGS> 6,602,617
<TOTAL-COSTS> 6,602,617
<OTHER-EXPENSES> 1,526,354
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,328
<INCOME-PRETAX> 273,968
<INCOME-TAX> 9,000
<INCOME-CONTINUING> 264,968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 264,968
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 0
</TABLE>
